Reactions of Industry experts on RBI announcements

The reverse repo rate (the interest rate at which the central bank absorbs surplus funds from banks) has been cut from 3.75% to 3.35%.

May 22, 2020 11:05 IST India Infoline News Service

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The Reserve Bank of India cut the repo rate from 4.40% to 4%. The reverse repo rate (the interest rate at which the central bank absorbs surplus funds from banks) has been cut from 3.75% to 3.35%.

RBI Governor Shaktikanta Das said the inflation outlook is highly uncertain due to the outbreak of the COVID-19 pandemic and expressed concern over elevated prices of pulses.

Below are the views of Industry experts:

Kamal Khetan, Chairman and Managing Director, Sunteck Realty Ltd
The 40 bps cut would give big boost to demand for credit appetite among new home buyers to avail housing loan resulting in growth of real estate sector.  We believe the announcements will help sustain positive market sentiments and give maximum mileage to organized and established developers."

Jimeet Modi, Founder & CEO, SAMCO Securities & StockNote
RBI with its monetary policy again gave a surprise rate cut of 0.4% and announced various liquidity measures. The disappointment came as there was no mention of the restructuring of loans or other supportive measures qua banks. The negative outlook on growth without a definitive number added to the woes. Extension of moratorium is good for the economy but in substance will negatively impact banks and NBFCs. As a whole, RBI has taken a calibrated approach to save the economy rather than favouring banks. 

Suman Chowdhury, Chief Analytical Officer at Acuité Ratings & Research
“The decision of the MPC to opt for an interim 40 bps rate cut is primarily driven by an overriding concern on the severe disruption in domestic demand on the back of the Covid-19 lockdown and the resultant risk of an economic contraction in FY21. While inflation continues to remain beyond RBI’s comfort levels, this has been led by supply driven factors in food items arising from the lockdown and is expected to moderate over the next few months. Nevertheless, the transmission of the lower rates in the monetary system will depend significantly on the deployment of various monetary tools by RBI including direct or indirect purchase of government securities and also the ability of the banks to cut deposit rates further.

Further, the loan moratorium has been extended by another 6 months given the protracted lockdown which is likely to continue in some parts of the country beyond the month of May. More importantly, the interest accrued on the working capital facilities during the moratorium period is proposed to be converted to a funded interest term loan which is payable by end of FY21. This will provide some relief particularly to the MSME and the corporate borrowers who are likely to witness liquidity challenges for an extended period of time. In our opinion, going forward, there may be a need to provide special dispensation for a more comprehensive restructuring of loans at least in some of the relatively vulnerable sectors.”

Suvodeep Rakshit, Vice President & Sr. Economist, Kotak Institutional Equities
“The RBI’s decision continues to indicate that they remain proactive. With the indication that the growth will be negative, we continue to see space for some further rate cut though the efficacy of rate cuts will progressively be lower. The extension of the moratorium bodes well. However, broader markets will focus on liquidity measures such as the path of OMO purchases (preferably a calendar) and regulatory measures to ensure both liquidity and solvency concerns are adequately addressed. Also, given the various dislocations that can emerge in the financial sector, markets will be focused on further steps by the RBI to safeguard the banking system (and broader financial system)”

Deepthi Mathew, Economist, Geojit Financial Services
By cutting the repo rate and reverse repo rate, RBI aims to inject more liquidity into the system. However, more importantly, what is needed is to remove the risk averseness as there is substantial liquidity in the banking sector. The rising food inflation rate could be a challenge to the RBI as it is following the inflation targeting regime. Similarly, the extension of the moratorium would bring in some relief to the borrowers, but it can put pressure on the bank's balance sheet.
Naveen Kulkarni, Chief Investment Officer, Axis Securities
The rate cut announced today will have limited impact in the short term, but it is helpful to revive growth over the longer term. However, the decision to extend the moratorium period by another three months is a significant negative for the private banks both in the medium and long term. The impact on the banking sector will be negative.

Sujan Hajra, Chief Economist and Executive Director, Anand Rathi
Rate cut of 40 bps is line with expectations as also extension of loan moratorium. The measure to convert the moratorium interest payment into a term loan payable in course of FY21 is the most important announcement. This can reduce NPA, at least in the next 12 months. The additional liquidity measures remain rather muted. The RBI also remains circumspect on growth and inflation outlook

VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services
RBI, which has been proactive in recent times, has risen to the occasion by advancing the policy meet to cut policy rates by 40bp. Also, the unequivocal statement that monetary policy will continue to be accommodative till growth revives sends positive signals. The fact that the central bank has refrained from giving a GDP growth figure is a reflection of the complexity in giving projections with the present growth models. Extension of the moratorium announced earlier by another 3 months is a relief. A takeaway from the policy announcement is that the stress in the banking sector will continue.

Abhishek Goenka, Founder & CEO, IFA Global
It was indeed a good policy by RBI. Extension of moratorium and converting the interest into term loans which essentially increases the payback cycle, swap facility for Exim banks, extension of import payments and increasing the exporters length of credit to 15 months from one year are steps in the right direction and eases the liquidity situation with export and import companies.
Overall the bonds rallied with yield on old 10-year benchmark falling 15bps in a knee jerk reaction. Rupee moves are fairly muted since we have huge selling interest by nationalized banks, likely on behalf of RBI at 75.85 levels.

Joseph Thomas, Head of Research, Emkay Wealth Management
The further cut in the repo rate by the RBI is more or less in line with expectations by majority of the market participants. The cut has been effected considering the fact that there is growing economic and financial stress on account of the pandemic involving all major sectors of economic activity. This would help in bringing down the market rates as also lending rates mostly at the short end of the curve.

The potential reduction in the cost of funds and the extension of moratorium will be supportive of financial stability which is of extreme importance as of today. We expect the rates across the curve to move lower from the current levels, though on a risk adjusted basis, the short to medium term would hold better value for long term investor portfolios.

In view of the large issues at the primary for the rest of the year from both central and state governments, the likely gains at the long end may come with elevated risks. The fall in the reverse repo rate would serve as a disincentive to banks who hold huge sums of liquidity to look at alternatives including gilts.

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