RBI Monetary Policy Review: Repo rate remains unchanged

RBI

In its second bi-monthly monetary meet of FY 2020-21 on August 6, the Reserve Bank of India (RBI) decided to make no changes in the key policy rates with accommodative stance. After two rate cuts – in March and May 2020, this is the first stance where the rate is unchanged.

RBI

As per the announcement, the repo rate and reserve repo rate remains at 4.00 pe cent and 3.35 percent, respectively.

In conversation with The Banking & Finance Post, experts from around the banking and financial sectors share their views on the new announcement and unraveled its impression.

Vishal Wagh, Research Head at Bonanza Portfolio Ltd

No rate cut from RBI and they continued with accommodative policy stance. Though managing inflation will be a challenge for RBI and RBI taking a few steps for it at the same time fighting with the situation arising out of pandemic is also necessary. Till the time market is giving thumbs-up for the policy. Gold-loan financing company stock will be beneficiary due to a hike of loan to value to 90% from 75%.  Looking at the current move, in gold if any correction in size of 15-20% may prove the same benefit as a risky one.

Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers

The August’20 monetary policy announcements have been in line with expectations – no change in any policy rate (we expected 25 bps cut in reverse repo rate) and announcement of a loan restructuring scheme. The details about loan restructuring would be worked out by the Kamath Committee. The policy delivers support to a large range of sectors including NBFCs, HFCs, corporate debt market, debt MF, agriculture and backward districts (for priority sector loans). Increase in LTV for gold loans is another significant step. While we have to wait for the fine prints on debt restructuring, the step would be beneficial for both banks and borrowers in the near-term. The longer-term implication for banks, however, is less clear. The Governor elaborated in details about the lowering of cost of fund and narrowing of spread in the debt market through the transmission of sharp rate cut and huge liquidity infusion in recent months.

However, MSME continues to see negative credit growth and YTD net allocation by banks to NBFCs remains negative. Acceleration of credit growth remains precondition for economic recovery and not much details are spelt out on addressing this issue. The Governor clearly indicated that space for further rate cuts remain as inflation is likely to soften in H2 FY21. We expect the RBI to cut repo rate by further 50 bps in FY21 but it may come once the lock-down restrictions are fully removed and inflation actually comes down. For banks, the measures rolled out today would improve earnings (loan restructuring-led lesser near-term provisioning) but the regulatory forbearance (debt restructuring, higher LTV on gold loans) can lead to lower valuation multiples in the medium-term.

Rohit Poddar, MD, Poddar Housing and Development Ltd and Joint Secretary, NAREDCO Maharashtra

Additional Specialty Liquidity Facility is a welcome move for the real estate sector just before the onset of the festival season.

RBI focusing on augmenting liquidity with an accommodative stance with no rate cut is a smart move in terms of channelizing the demand-based macros in the economy. As liquidity in the system is important to allow the financial institutions to transmit RBI’s rate cut benefits with reduced loan interest rates to the borrower, Additional Specialty Liquidity Facility (ASLF) is thereby, seen as a welcome move. ASLF of Rs 5000 crore to the National Housing Bank will provide much required cushioning for the housing finance companies to lower the home interest rates. This will translate into an upsurge in demand with a lower cost of credit to the home buyer and materialize in a likely upsurge in residential inventory offtake especially in the near onset of festivity in the country

Dr. Joseph Thomas, Head of Research – Emkay Wealth Management

As expected, it is status quo on rate, and the emphasis is more on continuing with the accommodative stance, and liquidity enhancement measures, and the restructuring of the stressed loan portfolios. The outlook for growth and inflation continues to be uncertain, and contraction in GDP growth is expected and inflationary pressures are expected to remain elevated in Q2 and it may moderate in Q3.

RBI has clearly stated that there is further room for a rate cut, but the RBI will wait and watch for a “durable reduction”, in inflation for further rate action. This amounts to saying that only if there is sustained fall in inflation especially food prices RBI may consider further rate cuts. This does not rule out further rate cuts but makes it linked to inflation performance.

The RBI policy has been effective in the desired direction in the last one year and especially so after the pandemic started. The transmission of the benefits of a rate cut has been possible only due to the efficient and easy liquidity management. The OMOs reduced the cost of funds across the board. Borrowing costs through CPs and CDs were at low single-digit levels after more than two decades. The NBFC space is better now due to the liquidity action.

What was needed from the RBI this time around was a reaffirmation of the accommodative policy, which the RBI has done very explicitly. The liquidity management is also being done pro-actively which would help the short- term rates to remain stable to lower. The policy takes cognizance of the economic realities around growth and inflation and has adopted a pragmatic approach to the resolution of important issues.

Also Read: RBI approves appointment of Sashidhar Jagdishan as HDFC Bank’s new MD & CEO

Jyoti Roy, DVP- Equity Strategist, Angel Broking Ltd

The MPC in its monetary policy meeting voted unanimously to keep the policy repo rate unchanged at 4% while maintaining their accommodative stance. Keeping in mind the fragile macroeconomic and financial conditions, the RBI has announced additional policy measures to enhance liquidity support for financial markets, improve the flow of credit and further ease financial stress caused by COVID-19 disruptions. Few of the additional measures announced by the RBI include additional special liquidity facility of Rs 10,000 crore which will be provided at the policy repo rate. While an amount of ₹5,000 crore will be provided to the NHB an amount of ₹5,000 crore will be provided to NABARD. This move will help improve credit flow to the HFC, smaller NBFCs and micro finance companies. The RBI has also raised the permissible loan to value ratio (LTV) for gold loans taken for non-agricultural purposes from 75% to 90%. The RBIs decision of keeping rates unchanged could have been influenced by the CPI inflation which came in at 6.09% for the month of June and is above the RBI’s upper threshold of 6%. While further rate cuts by the RBI will be dependent on inflation coming down current levels, we expect the RBI will try to ensure adequate credit flow to the economy along with taking steps to ensure full transmission of the 250 bps rate cuts done so far.

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