RBI in its bi-monthly Monetary Policy Review meeting decided to change the policy stance from calibrated tightening to neutral and to reduce the repo rate from 6.5% to 6.25%.
This was mainly due to
1. Slowdown in global economy,
2. Low inflation (just 2.2% in December with next year outlook of about 3.5% for the calendar year 2019),
3. Increase private investments, and
4. Stimulate growth
In addition, RBI also proposes to modify the foreign exchange derivative regulations to improve access and participation, set up a task force on offshore rupee markets, rationalization of interest rate derivatives, withdrawal of limit of single corporate bond by FPI and allowing companies under IBC to avail ECB.
RBI also changed the definition of bulk deposit from 1 crore to 2 crores and decided to establish umbrella organisation for Urban Co-Op banks, harmonization of NBFC as well as regulating Payment banks (Payment Gateway Services).
Takeaways from the RBI Monetary Policy Review for investors:
Positives:
1. The lower rate will help big companies to reduce debt burden.
2. EMIs will go down so more savings
3. The liquidity is infused that may benefit the struggling NBFC sector. Also, harmonization and merging of 3 NBFC categories into NBFC – Investment and Credit Company (NBFC-ICC) would provide better flexibility in operations.
4. Steps related to FPI limiit, forex derivative contracts, UBC, and Payment bank will increase confidence, streamline process and provide better regulation and oversight
Negatives:
1. It sends a message that current state of affairs are not positive and need to be supported with a rate cut.
2.. The policy is based on assumption of lower inflation, low price of oil and enough forex reserve. If these things turn negative, the policy stance will change. Interest rate and monetary policy are not like stock market that goes up and down frequently. It may stay the same for a long time before going up or going down but never fluctuate. While it can also be termed as proactive and flexible, it may send a wrong signal for long term investors.
3. FD interest rates will go down.
Lowering interest rate may also be seen as an extension of budget to win heart of common man in this election year!
RBI Monetary Policy Review and What it means for investors
About Jigar Patel, CFA (USA), MBA-Finance (USA), CPA (USA), CA (India) Mr. Jigar specializes on NRI Investments and Taxation. He is proud to be one of only 21 CFA Charterholders in India working as consultants. (In 2011, when he became CFA Charterholder, out of 97,173 CFA Charterholders in the World, only 697 Charterholders were in India and only 3% work as consultant; Source: www.newcfa.org). He received his MBA (Finance) from University of Illinois, Chicago, USA, CPA from USA and a Chartered Accountant from India. Jigar has over 15 years of professional experience including more than 4 years with KPMG USA’s Risk Advisory Services. Currently, he provides Wealth Management and taxation consulting serving clients from USA, UK, Americas, Europe, Middle East, Asia, Africa, Australia and India.