RBI gives liquidity boost but retains lending rates, gives optimistic outlook

By Sarkaritel October 9, 2020 20:10

Mumbai, Oct 9  The Reserve Bank made an expected move by retaining key lending rates, but cheered investors and home buyers by giving a liquidity boost and an optimistic outlook.

The central bank’s Monetary Policy Committee, in its penultimate meet for 2020, decided to maintain the repo — or short-term lending — rate for commercial banks, at 4 per cent on the back of persistently high inflation, fanned in part due to supply side disruptions along with seasonal factors.

The reverse repo rate was also left unchanged at 3.35 per cent, and the marginal standing facility (MSF) rate and the ‘Bank Rate’ at 4.2 per cent.

Nevertheless, the MPC, with three new members, voted to maintain an accommodative stance, thus opening up possibilities for more future rate cuts.

It was broadly expected that the RBI’s MPC might hold rates as recent data showed that retail inflation has been at an elevated level during June till August.

“The MPC evaluated domestic and global macroeconomic and financial conditions and voted unanimously to leave the policy repo rate unchanged at 4 per cent,” RBI Governor Shaktikanta Das said on Friday.

“It also decided to continue with the accommodative stance of monetary policy as long as necessary — at least during the current financial year and into the next year — to revive growth on a durable basis and mitigate the impact of Covid-19, while ensuring that inflation remains within the target going forward.”

Das said that India’s economy is entering into a decisive phase in the fight against the pandemic, citing that relative to pre-Covid levels, several high frequency indicators are pointing to the easing of contractions in various sectors of the economy and the emergence of impulses of growth.

“By all indications, the deep contractions of Q1:2020-21 are behind us; silver linings are visible in the flattening of the active caseload curve across the country,” he said.

“Barring the incidence of a second wave, India stands poised to shrug off the deathly grip of the virus and renew its tryst with its pre-Covid growth trajectory.”

The Governor pointed out that some of “this optimism is being reflected in people’s expectations”.

In the September 2020 round of the RBI’s survey, households expect inflation to decline modestly over the next three months, indicative of hope that supply chains are mending.

“Our projections indicate that inflation would ease closer to the target by Q4:2020-21. Our other surveys, also conducted in September, indicate that consumer confidence is turning upbeat on the general economic situation, employment and income over a one year ahead horizon.

“While the current assessment of the overall business situation remains in contraction in Q2, it has moved up from a low in Q1. Forward-looking business expectations are optimistic on the overall business situation, production, order books, employment, exports and capacity utilisation.”

Significantly, the inflation expectations denote the likely timing of the next rate cut as monetary policy is in essence a tool to contain rising prices.

Lately, retail inflation has been at an elevated level during July-August.

The retail or consumer price index stood at 6.69 per cent in August. It had risen to 6.73 per cent in July.

As per the data, retail inflation level has reached the upper limit of the medium-term CPI inflation target of four per cent. The target is set within a band of plus/minus two per cent.

On the growth part, Das said that the country’s real GDP may decline by 9.5 per cent in the financial year 2020-21.

“The modest recovery in various high-frequency indicators in September 2020 could strengthen further in the second half of 2020-21 with progressive unlocking of economic activity,” he said.

“Agriculture and allied 5 activities could well lead the revival by boosting rural demand. Manufacturing firms expect capacity utilisation to recover in Q3:2020-21 and activity to gain some traction from Q3 onwards.”

However, he predicted that both private investment and exports are likely to be subdued, especially as external demand is still anaemic.

“For the year 2020-21 as a whole, therefore, real GDP is expected to decline by 9.5 per cent, with risks tilted to the downside. If, however, the current momentum of upturn gains ground, a faster and stronger rebound is eminently feasible,” he said.

Nonetheless, the RBI said that it will resort to on-tap long-term repo operations and open market bond purchases to ensure liquidity in the banking system.

It has also eased capital requirements on home loans to spur lending to the real estate sector.

These statements buoyed the Indian benchmark indices which rose for the seventh consecutive session on Friday making it the best winning streak in almost a year.

“The focus was on unconventional measures like enhanced OMOs which also now include SDLs, on-tap TLTROs, extending HTM limits timeline etc. The aim clearly is to ease sovereign rates, which should percolate down to corporates as well and also will incentivize bank lending,” said Madhavi Arora, Lead Economist, FX and Rates for Edelweiss Securities.

Sunil Kumar Sinha, Principal Economist, India Ratings and Research, said: “The articulation to continue with the accommodative stance in the next financial year clearly indicates that despite uneasiness due to the elevated Aretail inflation, it is in no hurry to reverse the rate cycle.”

Suman Chowdhury, Chief Analytical Officer, Acuite Ratings & Research said: “Although RBI has highlighted some of the emerging green shoots in the economic landscape including a record agricultural output in the current kharif season, it has also for the first time in the current year has projected a GDP contraction of 9.5 per cent.”

“In the context of increased concerns on higher bond yields and higher government borrowings, RBI has given out a strong message that it will manage yields in an aggressive manner through larger OMOs which will also cover SDLs.”

According to Aditi Nayar, Principal Economist, ICRA: “The policy statement struck a confident note on the outlook for economic activity, especially the projection of a mild growth in Q4 FY2021, which appears to be coloured by the spate of positive data for September 2020, the sustainability of which is as-yet uncertain.”

Newly-appointed SBI Chairman Dinesh Kumar Khara said: “The policy has also targeted specific sectors that have high forward and backward linkages notably the retail and real estate sector.”

“Additionally, the decision to operationalise the co-origination model is right as it brings the best of banks and NBFCs together. This will surely increase the reach of the financial sector at such a critical point.”

On the liquidity measures announced by the RBI, Sameer Kaul, CEO and MD of TrustPlutus Wealth Managers (India) said: “The effect of the above measures are already visible with G-Sec yields falling by 8-15 bps across maturities and the INR appreciating to a one month high against the USD.”

Honeyy Katiyal, founder of Investors Clinic, noted that the announcement by the RBI to extend the scheme for co-lending to all NBFCs and HFCs will help to ease credit availability for the important estate sector.

“The real estate industry which was not performing well for long, has witnessed the increase in activities in both commercial and residential from the last quarter. We hope that the festival season will further help revive demand in the sector,” he said.

By Sarkaritel October 9, 2020 20:10