The Reserve Bank of India (RBI) on Thursday cut the policy rate by 25 basis points (bps), as widely expected, and changed its stance to ‘accommodative’, which Governor Shaktikanta Das said meant rate hikes were off the table. Economists, however, see this as a sign of more rate cuts to come.

The rate cut was to “accommodate growth concerns by supporting efforts to boost aggregate demand and, in particular, reinvigorate private investment activity” while remaining consistent with the flexible inflation targeting mandate of the six-member Monetary Policy Committee (MPC), the policy statement said. Weakening growth impulses and a “sharp slowdown” in investment and consumption were a “matter of concern”, it added.

The inflation trajectory, it said, remained below the mid-point target of 4 per cent mandated to the MPC, even after taking into account the expected transmission of the past two policy rate cuts.

In the post-policy conference, the governor said the central bank was closely monitoring the developments in non-banking financial companies (NBFCs) and would not hesitate to take “necessary steps required to ensure that financial stability is not adversely impacted in any manner by any development. ”

This, in effect, means the RBI could be contemplating some kind of liquidity line for the NBFC segment, particularly when Dewan Housing Finance (DHFL), the third-largest housing finance company in the country, urgently needs liquidity support, along with others in the space.

The RBI’s consideration, the governor said, would mainly be to protect banks that have huge exposures to these NBFCs. Housing finance companies (HFCs) as such are regulated by a separate regulator, the National Housing Bank.

After the cut in the second bi-monthly monetary policy review this financial year, the repo rate now stands at 5.75 per cent. This is the third consecutive cut by 25 bps each since February. In all his monetary policies, the Das-led MPC has executed a cut.

The past 50-bp cut had resulted in the weighted average lending rate to fall by 21 bps in fresh rupee loans by banks. But for old loans, the rate continues to remain high and the average has increased by 4 bps. “Generally, the transmission takes four to six months, but the transmission this time is much faster,” Das said. The RBI governor said liquidity would continue to remain comfortable and available at all times for all productive purposes, which should aid transmission too. He expected banks to catch up with cumulative rate cuts. But bankers say transmission is not a straight path, as small savings rates remain elevated, which eat away banks’ deposits. Unless banks lower their deposit rates, they cannot cut lending rate too, said bankers. Still, some rate cuts could be expected in the immediate term.

“With its ‘accommodative’ stance, we expect the RBI to remain supportive, maintaining liquidity at a slight surplus over the next few months. On the margin, this could aid transmission of policy rate cuts,” said Pranjul Bhandari, chief economist of HSBC...... BS