RBI cuts rate for first time in 18 months, moves on rupee market, addresses NBFC crisis and extends relief to farmers
Reserve Bank of India (RBI) will set up a task force on the offshore rupee markets (offshore non-deliverables forward market – NDF), the size of which is estimated to be over $20 billion according to forex experts. The volatility in the domestic forex market is often attributed to the rates of the rupee in the offshore market, which is used by foreign banks and also Indian companies with an overseas presence.
NDF operates 24x7 in major financial markets like London, Dubai, Singapore and other places where the market participants can place bets on the level of the rupee and also hedge their rupee exposures.
"Simple extension of the forex market to 11 pm and allowing delivery on exchange will do wonders for our forex market. It will also have a positive impact on the bond market as these are interconnected," said Anindya Banerjee, currency analyst at Kotak Securities.
The rupee on Thursday rose by 11 paise to close at Rs 71.45 against the US dollar after RBI cut the repo rate and changed its policy stance to neutral. By lowering the inflation forecast for the next fiscal, it also hinted at more rate cuts.
Ritesh Bhansali, vice-president, Mecklai Financial, said, "There is a lot of liquidity that is flowing into the overseas market which is a concern for the central bank. The task force will study the market and see what relaxations can be offered to the foreign investors to draw them to the domestic market."
RBI's policy efforts have been to align incentives for non-residents to gradually move to the domestic market for their hedging requirements. "At the same time, there is a need to improve residents' access to derivatives markets to hedge their currency risks. In order to take forward the process of gradual opening up of the foreign exchange market and also to benefit from a wider range of participants and views, it is proposed to set up a task force on offshore rupee markets. The task force will examine the issues relating to the offshore rupee markets in depth and recommend appropriate policy measures that also factor in the requirement of ensuring the stability of the external value of the rupee," RBI said in a release.
Research by the National Institute of Public Finance and Policy shows India's turnover in the NDF market was at $16.5 billion in 2016, which was 16.7% higher than the 2013 level. BRICS (Brazil, Russia, India, China and South Africa) currencies formed around 35% of NDF in 2016.
"For the first time, RBI is acknowledging the existence of the non-deliverable forwards market. They will study the market and understand the reason why the domestic forex market moves with the NDF, how to control the NDF market," said a forex dealer.
MONETARY POLICY
- RBI cuts key lending rate (repo) by 0.25% to 6.25%
- Reverse repo rate cut to 6%, bank rate to 6.5%, CRR unchanged at 4%
- Headline inflation estimates revised down to 2.8% in March quarter, 3.2-3.4% in the first half of next fiscal and 3.9% in Q3 of FY20
- Projects GDP growth to accelerate to 7.4% next fiscal, from 7.2% in 2018-19
- Pegs April-September growth in range of 7.2-7.4%, and 7.5% in Q3 of 2019-20
- Oil price outlook hazy, trade tensions to weigh on global growth prospects
- To revise definition of bulk deposits as single rupee deposits of Rs 2 crore and above from Rs 1 crore currently
- To issue guidelines to harmonise major categories of NBFCs
- Proposes to set up a task force on offshore rupee markets
- Removes restrictions on foreign portfolio investors investing in the corporate debt market
- To come out with a discussion paper on payment gateway service providers and payment aggregators
- Hikes limit of collateral-free agricultural loans to Rs 1.6 lakh from Rs 1 lakh, to help small and marginal farmers
- Monetary policy committee votes 4:2 in favour of the rate cut, unanimous on the change in stance
- Two monetary policy committee members Chetan Ghate and Viral Acharya were for status quo in rates
- Next meeting of the MPC from April 2-4
The shift in stance provides flexibility to address, and the room to address, sustained growth of India’s economy over the coming months as long as inflation remains benign
Shaktikanta Das, governor, RBI
There are several innovative announcements in policy apart from a rate cut that could potentially trigger a new paradigm for financial markets... Opening up the ECB route for applicants under the IBC could facilitate a faster turnaround
Rajnish Kumar, chairman, SBI
We should see a moderation in borrowing rates. Providing banks with increased flexibility on bulk deposits is a welcome move and will assist them in better managing their asset liability mismatches
Zarin Daruwala, CEO, India, Standard Chartered Bank
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