RBI Monetary Policy: Reactions from Industry Experts

RBI kept repo rate untouched at 4%; and reverse repo rate at 3.35% while maintaining the accommodative stance.

August 06, 2020 3:21 IST | India Infoline News Service
The six-member monetary policy committee (MPC), headed by the Reserve Bank of India (RBI) governor Shaktikanta Das, kept repo rate untouched at 4%; and reverse repo rate at 3.35% while maintaining the accommodative stance.

RBI governor Shaktikanta Das said inflation is expected to stay elevated in Q2 FY21 but it is likely to ease in H2 aided by favourable base effects. Real GDP growth will remain in the negative, Das said. However, he added that any positive news on the COVID-19 containment efforts would change this scenario. RBI is taking measures to enhance liquidity support, further ease financial stress.

Rajnish Kumar, Chairman, SBI, and Chairman, IBA

“The Reserve Bank of India’s today’s monetary policy statement draws a fine balance between the challenges posed due to COVID-19 pandemic shock and the need to support growth and financial stability. On the macroeconomic front, the outlook to growth continues to be negative with RBI refraining to give any number to the extent of GDP contraction on account of COVID-19. The asymmetric recovery across rural and urban areas poses challenge in policy formulation. The outlook on inflation is equally uncertain as supply shock has limited the scope of monetary policy in containing  risk. On the balance, demand shock appears to net out the supply shock on price levels. On the regulatory and development policy front, the RBI has carefully addressed the concerns emanating from the wider market participants. Notably, the RBI has addressed the need to offer some form of restructuring facility for standard accounts that are facing difficulty in debt restructuring. We welcome the fact that a new Resolution Framework for COVID-19-related Stress facility has been extended to large corporate, SME and personal loans with necessary safeguards in each segment. The announcement on CRR, mechanism to check and track multiple operating accounts by large borrowers will benefit the industry at large. Harmonising the capital charge for market risk for debt and equity mutual funds is also a good move towards capital conservation given the volatility has increased after COVID-19 pandemic. In conclusion, the decision to hold the policy rate is a prudent one in the prevailing circumstances as the trajectory of economic growth, inflation and external demand continues to remain uncertain. RBI’s calibrated approach is in perfect consonance with evolving situation while keeping enough headroom for the future.”

A. K. Das, Managing Director & CEO, Bank of India

RBI policy announced today features several positives. Measures such as additional liquidity of Rs.10,000 Cr to NABARD and NHB towards directed lending to NBFC and HFC, extension of timeline of MSME restructuring, incentive scheme for Priority Sector Lending shall work favorably towards stability of financial sector to support growth and recovery in the economy. Provision of resolution framework for the COVID-19 related stressed assets is another welcome move by the RBI.

Umesh Revankar, MD and CEO, Shriram Transport Finance.

“RBI maintained status quo on policy rates but said that the accommodative stance will continue as long as necessary to revive growth and mitigate the impact of the pandemic. In this direction, the central bank has decided not to extend the moratorium and has instead allowed lenders to restructure some loans which is a positive change as account classification will remain standard and this will also ease provision requirements ahead. This is a welcome step and coupled with earlier measures taken by the regulator to ensure adequate liquidity and bring down borrowing costs, it will surely enhance the financial stability of the system.”

Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank

The Monetary Policy Committee unanimously decided to keep all key rates - repo, reverse repo, MSF and the bank rate unchanged. This is against the backdrop of rate cuts having been front loaded since February this year, inflation trending above 6% and likely to remain elevated in Q2, ample liquidity in the system and better transmission of rates. This pause also gives the MPC the option of effecting a future rate cut when inflation falls and based on how the economy progresses. . The MPC has also maintained its accommodative stance. .

While most countries globally are struggling with growth, liquidity has been ample and there has been buoyancy across markets. Emerging markets, including India, have seen significant inflows which has kept currencies stable. The RBI Governor reiterated that GDP growth is expected to be negative in Q2 and for the year and inflation is likely to trend much lower in H2 this fiscal. High frequency data shows better traction in June/July and the rural markets are likely to be stable given a normal monsoon.

The much-awaited restructuring scheme for the MSME sector was announced, which will provide additional relief to a sector deeply impacted by COVID-19. Other measures such as increasing the permissible loan to value ratio (LTV) for gold loans to 90 percent till March 31, 2021, will help households facing a cash crunch. Overall, the policy was on expected lines and in keeping with the current market and business environment.

Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank

“MPCs caution on uncertainty on inflation trajectory suggests that chances of further easing will henceforth remain a function clearly of evolution of supply side shocks. We see next few readings still elevated near 6% and hence we do not see any rate easing in at least the October meeting. On a positive note the other regulatory and development measures announced today will go a long way in ensuring financial stability.”

Suvodeep Rakshit, Vice President & Senior Economist at Kotak Institutional Equities

“The RBI MPC’s decision on keeping policy rates unchanged was not unexpected. The efficacy of rate cuts is anyway low in the current juncture and the past rate cuts are still feeding into the system. The MPC was cautious with adequate concerns on the evolution of inflation trajectory while being fully supportive of growth prospects as and when inflation trajectory allows. We expect the RBI to pause in the near term with possibility of rate cut (if any) visible from the December policy when inflation starts to fall. Going forward, liquidity measures will be important to watch for as the central and state governments borrow heavily under the revised borrowing plans. More importantly, the RBI allowed for resolution plan under the June 7, 2019 notification of Prudential Framework for Resolution of Stressed Assets along with a separate framework for personal loans too. This will help in alleviating some of the stress that is likely to emerge as well as address some of the most affected sectors. The provisioning norms along with rule-based and time-bound resolution plan will likely ensure that banks are prudent in utilizing this window and addresses genuine stressed cases.”

Vivek Kumar, Senior Economist, YES BANK

“In contrast to consensus expectation of a 25 bps rate cut, status quo in RBI’s monetary policy comes as a surprise. This appears to have emanated from the recent surge in inflationary pressures on account of COVID-19 related supply disruptions, imposition of higher taxes on petroleum products, hike in telecom charges, and jump in few metal prices.

We acknowledge these factors and their role in imparting near term upside pressure to inflation. However, we are also of the opinion that they are unlikely to be durable. Gradual opening up of the economy, normal monsoon outturn, and disinflationary impact of a wide negative output gap would soon start dominating the downside risk to inflation. This should continue to leave the door open for incremental monetary accommodation in the near term.

Meanwhile, special relaxation in debt restructuring framework, enhancement of refinance facility to AIFIs by Rs 100 bn, broadening the scope of PSL should help in improving credit flow while mitigating the economic fallout of COVID-19.”

Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak Mahindra Asset Management Company 

“Status quo was on expected lines. Today’s inaction in no way suggests a U-turn in interest rate trajectory. The MPC members have been mindful of the recent spike in CPI inflation, hence the inaction seems valid. Growth worries remaining, the accommodative bias suggests scope for further easing as inflation recedes in the second half of Fy21. We expect benign rate scenario to remain conducive for bonds.”

Dr. Sunil Kumar Sinha, Principal Economist and Director - Public Finance, India Ratings & Research
As India Ratings and Research (Ind-Ra) had expected, the RBI in its monetary policy review announced on 6 August 2020, left the repo rate, reverse repo rate and marginal standing facility unchanged at 4.0%, 3.35% and 4.25% respectively but reiterated that its accommodative policy stance will continue. The spike in retail inflation lately has made monetary policy committee go for a pause on the policy rate. As the economic recovery is still fragile and may continue to face sporadic turmoil going ahead, Ind-Ra believes it will require sustained support from the RBI in terms of all the policy levers  - repo rate, liquidity and regulation. RBI has already made some regulatory policy related announcements today and they are i) enhanced liquidity facility HFCs, NBFCs and NBFC-MFIs , ii) allowing COVID-19 impacted borrower accounts for resolution under June 7th Prudential Framework provided the account was classified as standard, but not in default for more than 30 days with any lending institution as on March 1, 2020, iii) extension of MSMEs that were in default but ‘standard’ as on January 1, 2020 to March 1, 2020 to qualify under restructuring framework, iv) increase in the permissible loan to value ratio for loans against pledge of gold ornaments /jewellery  to 90% from the existing 75% for non-agricultural purposes. These are important and proactive steps, but Ind-Ra believes these may require additions/modifications as we move forward because the contour of COVID - 19  related impact is still unfolding. This is evident from the fact that partial/local lockdowns are being imposed in many parts of the country to contain the spread of COVID - 19  cases which is now nearing 2 million mark. This has the potential to slowdown and/or derail the insipient economic  recovery as captured by the moderation in contraction of IIP and services PMI.

The supply chain disruptions with implications for both food and non-food prices in combination with elevated fuel prices continue to pose a threat to retail inflation, but the same is expected to ease in 2HFY21 due to favourable base effects.  Thus, Ind-Ra believes todays pause is not the end of the rate cut cycle. The earlier policy rate cut and the extent of its transmission into the economy will be an important monitorable for RBI to decide the quantum and the extent of policy rate cut going forward, given that the space available to do so is quite limited.

Avnish Jain  Head of Fixed Income, Canara Robeco Asset Management Company

“The monetary policy committee (MPC) maintained status quo on rates in August policy, as inflation surprised on upside and the MPC gave due weightage on its mandate on medium term inflation target. While the MPC expects the growth to contract in FY2021, the Governor noted that there was good transmission on past policy cuts and liquidity operations in terms of sharp fall in rates for money market and corporate bonds, with NBFC also able to take advantage of the low rate scenario and hence a pause at this juncture is justified. The MPC expects the inflation to fall in the 2HFY2021. The Governor noted that there was policy space for further easing but must be used judiciously indicating the pace of rate cuts as well quantum of cuts are likely to be lower in the future. In terms of non monetary actions, RBI provided for restructuring of some lender loans (hit by COVID pandemic) with many safeguards.

Market yields rose on rate status quo as well as no RBI action on further liquidity measures to support market with the 10Y rising by ~5 bps. Market was not expecting any rate cut and hence the sell-off was limited. Market yields may inch up a little in near term. However RBI has done ad-hoc OMO purchase / “twist” operations whenever yields have gone up and hence market participants would be wary of the same. Markets may remain in a narrow trading zone, as future policy action is not ruled out. We expect 10Y to remain within 5.75-5.95% range.

Murthy Nagarajan, Head-Fixed Income, Tata Mutual Fund said that, "RBI as expected has kept the repo and reverse repo rates unchanged. RBI measures to equate bank investments in mutual fund to their direct investment for capital adequacy purpose, should see good amount of flows in the mutual fund industry and stabilize bond yields. Mutual fund normally sell in quarter ends to meet redemption request of banks. However, no measures in terms of increasing Held to Maturity Limits or a OMO calendar is a negative for the bond market. Normally, when the ten year yields have come around 6 % levels, RBI has intervened through OMO or through operation twist. The old ten year is trading at 5.95 %, it does not look like the market should fall further from these levels, given the tendency of RBI to intervene at these levels.

RBI has said it will maintain its accommodative monetary stance. They also expect this year GDP to be negative. CPI inflation trajectory is 3.5 %, for this reason  governor stated scope for rate cut exist in the economy but it has to be used judiciously to get maximum benefit. RBI is also in favour of continuing with easy liquidity conditions. Investors should look at investing in short term bond funds and banking and PSU funds, which predominantly invests in short and medium term papers to get higher accrual and some capital appreciation, when rate cuts happens. "

Sudhakar Shanbhag, Chief Investment Officer, Kotak Mahindra Life Insurance Company Ltd.

"The MPCs decision to keep rates unchanged was in line with our expectations though the market had some expectations. The RBI has already cut 115bp this FY and inflation over last couple months was beyond the band expected. However due to the growth slowdown the RBI may act in future policies and inflation is also expected to come down in H2 due to base effects. Enough liquidity is ensured for the market."

Pankaj Pathak - Fund Manager - Fixed Income, Quantum Mutual Fund

The RBI has expectedly kept the rates unchanged. Indian interest rates are already at decade lows and good quality corporates are able to borrow at levels not seen before. The space for further rate cuts is limited and thus needs to be timed well for effectiveness. If the conditions exist then, rate cuts done when the government announces its next round of stimulus may prove more effective. The RBI has to worry about the depositors, the silent saver, and hence needs to be careful and calibrated in rate cuts.

There is now uncertainty on when and whether there would be another rate cut and hence we may see bond yields drift higher. Bond markets will also be disappointed on the lack of announcements of either Open Market Operations. The economy remains weak as the COVID situation remains unresolved. We will continue to caution investors and advise them to keep their debt/fixed income investments in safe and liquid products.

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research

“MPC’s decision to hold on to the existing rates appears to stem from its belief that the short term inflation outlook will be uncertain due to supply constraints and cost-push factors. Nevertheless, the MPC statement also highlights its concerns on the ongoing economic contraction in the current year and its intent to track the inflation trend closely so as to ensure timely action as and when appropriate. While the repo rates are almost close to the bottom, we believe there is a possibility of another round of 25-50 bps of a rate cut over the next 6 months. Importantly, RBI has announced steps to address the increased credit concerns arising from the COVID pandemic by constituting an expert committee that will lay down the principles for corporate debt restructuring. This is critical to impart credibility and transparency to any debt resolution that may be undertaken by the banks without any downgrade from the standard asset category.

There will be separate windows available for a restructuring of loans of SMEs and individual borrowers who have been impacted by the pandemic. We believe a successful restructuring and resolution programme for COVID impacted loans will go a long way in mitigating credit aversion and facilitating financial stability. RBI has also announced additional liquidity measures over and above those that have already been taken to reduce the asset-liability challenges in the NBFC sector over the last 3-4 months. Although the declining credit spreads are an encouraging indicator of an improving financing environment, the revival in the weak credit growth will remain a big challenge for the central bank.”

Sanjay Kumar, CEO & MD, Elior India
" Injection of additional liquidity is welcome a move.  NABARD is one of the few institutions that has consistently exceeded its lending targets unlike commercial banks. It is quite likely that this credit flow will spur rural economic activity and in turn give a fillip to rural consumption. Hence, while the fillip to rural credit is welcome it is important to note that industrial activity and flow of credit to manufacturing remains muted. Hence the upswing in agricultural production may not necessarily provide more remunerative prices to farmers unless household consumption increases and that seems unlikely in the near term. In my opinion, India needs a more aggressive fiscal package to compliment the monetary policy which one hopes will happen sometime soon.”

Unmesh Kulkarni, Managing Director Senior Advisor, Julius Baer India
With the start of Covid-19, RBI’s stance/priority had clearly changed from containment of inflation to addressing the stress in the economy and tackling growth-related challenges. In today’s policy, RBI MPC reiterated its commitment to address growth challenges of the economy (especially second-wave effects of Covid-19), by maintaining an accommodative stance for as long as necessary. This implies that RBI could be looking at an extended period of low rates. However, RBI has re-introduced some focus on inflation containment in today’s policy, and has expressed some concern around supply disruption-led inflationary impact on food prices, along with cost-push inflation arising from higher taxes on petroleum products, hikes in telecom charges, rising raw material costs reflected in upward revisions in steel prices and rise in gold prices. Further, it has expressed uncertainty around its inflation outlook.
RBI has drawn comfort from financial conditions having eased substantially (spreads have eased across credit spectrum), comfortable liquidity, transmission of rate cuts into the bank lending and improved access to credit.
Going forward, RBI is likely to use its monetary policy tools judiciously, implying that we could be close to the end of the easing cycle. RBI is more likely to use other tools to ensure sufficient liquidity and towards stability of the financial markets. Any further easing by RBI is going to be contingent on a durable decline in inflation.

RBI also announced some additional welcome measures to address pressures on some sectors in the economy arising from Covid-19. They include additional liquidity for housing finance companies (through NHB) and for smaller NBFCs and micro-finance companies (through NABARD), resolution plan for Covid-19 stress of eligible borrowers, restructuring of MSME debt and increasing loan-to-value for gold ornaments and jewelry for mitigating impact of Covid-19 on households. The announcement to harmonize the capital charge (for market risk) treatment of investment by banks in Debt Mutual Funds / ETFs and direct debt instruments, augurs well for the bond market, as there could be higher participation by banks in the bond markets over a period of time.

Aditi Nayar, Principal Economist, ICRA Ltd

Contrary to our anticipation of a front-loaded rate cut, the Monetary Policy Committee (MPC) unanimously kept the policy rates unchanged, given its primary mandate of ensuring CPI inflation in a band of 2-6%, which has been breached in Q1 FY2021 amid issues on data availability. Moreover, its statement revealed a marked uneasiness on the drivers of inflation, despite its expectation that inflation will soften in H2 FY2021, benefitting partly from a favorable base effect. At the same time, the MPC did not alter its accommodative stance, to bolster its view that supporting an economic recovery assumes primacy in the conduct of monetary policy. While it reiterated that space is available for future monetary policy action, the emphasis that it should be used judiciously suggests that the space is limited. Accordingly, we expect only one more rate cut in Q3 FY2021, the timing of which will be guided by how quickly the headline CPI inflation reverts to 4%. 

Published as received

The views and opinions expressed are not of IIFL Securities, indiainfoline.com

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