Here are the top questions that assume significance in the backdrop of the current economic slump:
The most important question
The cut in FY20 real GDP growth projection was one of the bigger talking points after today’s meeting. GDP estimates for FY20 were cut to 6.1 per cent from the 6.9 per cent estimated earlier.
In that backdrop, today’s rate action came across some sort of an anachronism to finance watchers — why just a 25 bps cut in the benchmark rate when growth estimates have been cut this sharply?
“While the recent measures announced by the government are likely to help strengthen private consumption and spur private investment activity, the continuing slowdown warrants intensified efforts to restore the growth momentum,” the MPC said in its statement.
The new estimate follows a deep slump in GDP growth to a six-year low in the last quarter, primarily because of a massive consumption slowdown and a precipitous fall in private investments.
The government has implemented a host of curative steps, including a sharp 10% cut in corporate taxes, as part of its efforts to front-load enabling measures. Despite all this, the near-term outlook of the economy is “fraught with several risks”, the RBI admitted.
Transmission: Zero trickle down
Here’s a dampener for those who were hoping that home, auto and personal loan rates may fall sharply after these cuts: that looks far-fetched as NPA-laden banks will naturally try to protect their margins with higher spreads over benchmark rates.
The issue of the lack of transmission has continued to stick out like a sore thumb even after RBI has so far cut interest rates on five occasions in a row.
Interest rates have now been cumulatively brought down by 135 bps this year. The central bank, however, admits that “transmission has remained staggered and incomplete.”
There is currently a lot of pressure on banks’ net interest margin after the RBI ordered them to adopt a new rate formula based on market-linked benchmarks.
Fiscal road map: Sacred target
Das said there is no reason to doubt the government’s ability to stick to its fiscal deficit targets. It’s a target that the government has fixed itself, and it’s something that the government will take care of, he said.
It may be noted that the government has made a statement that they will adhere to the fiscal deficit; whatever shortfall is expected from the tax cuts, the Centre has ways to make up for it; we have no reason to doubt the govt’s statement, we will only go by that target, said RBI’s official statement.
Interim dividend: Rumour, put to rest
The Governor denied that there was any demand from the government for interim dividend — an issue that sparked a lot of speculations a few days back, especially in view of the increasing pressure on government finances due to a fall in revenue mop-up.
Das said he was not aware of any demand by the government for an interim dividend. “We have not received any demand for interim dividend of Rs 30,000 crore from the government. I have only seen media reports about it,” was all that the Governor had to say about the episode.
There were widespread reports in the media that Modi government might seek an interim dividend of about Rs 30,000 crore from the RBI towards the end of the financial year. Reports said this dividend was meant to help meet its fiscal deficit target of 3.3 per cent of GDP for 2019-20.
PMC Bank: The elephant in the room
The PMC Bank episode is a one-off case and there is no point linking it to the state of the broader banking scene, Governor Das insisted.
The health of Indian banking is sound and there is no call for any kind of panic, said Das while answering a question on the cooperative bank that has unravelled spectacularly.
Das said the central bank acted moved in swiftly in this particular case, and that RBI won’t allow any cooperative bank to collapse. The RBI would opt for prompt corrective action (PCA) wherever and whenever appropriate, he added.
The Governor also appealed to depositors not to worry about banks. Dire situations are sometimes triggered by rumours, he said, appealing the public not to go by such hearsay.