Economic challenges turned RBI, other central banks dovish in 2019: Care Ratings

Mumbai: The year 2019, marked by challenges on the economic front, saw several central banks globally, including Reserve Bank of India (RBI), turn dovish and lower policy rates, said a report by Care Ratings on Tuesday.

With the escalation of trade war between the US and China and declining consumption across countries, many major economies slipped into the slowdown mode and the fears of global economic recession confronted the markets. Therefore, to rescue the economies from the possible downturn, many central banks adopted dovish stances and India was not an exception, the report said.

“With slower pace of economic growth, stagnant investment and declining private consumption, the RBI too adopted an accommodative stance and lowered interest rates five times out of six monetary policy reviews held during the calendar year 2019,” it said.

According to Care Ratings, following the liquidity crisis, especially in non-banking financial companies (NBFCs), liquidity in the banking system continued to remain in the deficit up to June. However, the RBI infused liquidity via open market operations (OMOs) of ₹16,500 crore between January and June, helping improve the liquidity situation.

In addition, the slowdown and the bad loan crisis limited lending activities of banks, leading to sluggish credit growth.

“Lower credit offtake compared with the deposit growth led to increased liquidity in the banking system. Since June 2019 onwards, the banking system turned into liquidity surplus aggregating over ₹2 lakh crore,” it said.

In 2019, RBI reduced the repo rate by 135 bps between February and October, and it was only in its December policy that it halted its rate-cutting spree. The repo rate currently stands at 5.15%.

Meanwhile, yields on the benchmark government securities (GSec) declined from a high of around 7.5% in January 2019 to 6.3% in July 2019, aided by liquidity surplus in the banking system, repo rate cut by the RBI, subdued crude oil prices and increase in the foreign investment in government securities.

Care Ratings said, since September 2019, Gsec yields moved upwards with intermittent volatility in global crude oil prices, concerns over fiscal slippages post the announcement of the corporate tax rate cut, and expectations of further rate cut by the RBI to support the slowing economy.

However, yields on corporate bonds have not seen commensurate decline with the reduction in the GSec yields in the first half of 2019, the report pointed out. The corporate bond spreads remained range bound given the credit risk associated with them, it said, adding that during the year, the spreads on the AAA-rated corporate bond, spreads moved in the range of 82 bps to 169 bps.

Some moderation in the spreads has been witnessed November onwards with the AAA-rated corporate bond spreads hovering around 100 bps, it said.