Home >Industry >Banking >RBI's accommodative stance, liquidity measures have analysts divided

The Reserve Bank of India (RBI) left key interest rates unchanged on Friday but signalled more easing ahead to support an economy that it sees contracting 9.5 per cent in the current fiscal.

The accommodative stance and many liquidity boosting measures by the Monetary Policy Committee (MPC) on Friday left economists divided over the scope of a rate cut this fiscal, with some expecting it in February while others ruling it out citing higher inflation.

Earlier in the day, RBI Governor Shaktikanta Das left the key policy rate unchanged at 4 per cent, but offered a host of measures to contain the bond yields by announcing more OMOs and targeted long-term repos apart from special OMOs for state borrowings.

While Abheek Barua, the chief economist at HDFC Bank expects a rate cut in the final policy review in February, principal economists at Icra Ratings Aditi Nayar rules out the same, saying the supply side boost to tame inflation is unlikely to have the desired effect.

"Today's monetary policy was as aggressively accommodative as possible without cutting the policy rate. The decision to remain accommodative for an extended period and to look through "transient humps" in inflation reveals an appreciation for the basic principles of economics - that a GDP contraction of 9.5 per cent is simply not compatible with demand-side inflation pressures," Barua wrote in a note after the policy review.

Inflation has remained high because of persistent supply-side problems.

"But persistence itself cannot transform a supply-driven problem to a demand-side concern amenable to monetary policy-driven containment. Given the stance, there is a significant probability of a rate cut in February, if not in December itself as inflation, as we expect, moderates," Barua added.

Sounding contrary, Nayar feels the confidence in the growth revival is coloured by the spate of positive data prints in September, but their sustainability is uncertain.

"We are circumspect about generalising these early green shoots, as they have benefited from base effects and one-off shifts in some sectors... Inflation may not relent below 5 per cent until December, dimming hopes of a rate cut this fiscal year.

"Also, the timing of future repo rate cuts has been rendered less relevant by the liquidity enhancing measures and the expectation of continued support going forward," she argued.

On the many forms of OMOs, Kuntal Sur, partner and financial risk and regulation leader at PwC India, said the proposed open market operations to be extended to state development loans will ease the states' borrowing programmes and bring down the cost, while the proposed 1-lakh-crore on-tap targeted long-term repos with up to 3 years tenors will help the specific sectors.

The decision to increase the definition of "regulatory retail" threshold from 5 crore to 7.5 crore in respect of all fresh as well as incremental exposures for the SMEs and retail segments will facilitate the higher credit flow to these segments.

"This may incentivise banks to lend these sectors more as new definitions have increased the target segment," he said, adding rationalising the risk weighting of all new home loans will see the new risk of new loans will be linked only to the LTV ratio, which means the lower the ratio, the lower the risks and borrowers will get the interest rate benefits from institutions.

On the RBI signalling that it would "do whatever it takes" to align risk-free government bond yields with the fundamentals of the economy, Barua said this involves key changes such as an increase in the size of OMOs and innovations like OMOs in state bonds.

These measures will ensure that the upward pressure on yields that have built up on the back of heavy anticipated supply of Central and state bonds is likely to moderate, he said.

Govinda Rao, chief economic advisor at Brickwork Ratings, said that the OMOs for the states which have already borrowed 55 per cent more than the last year at higher prices will help manage the yield curve so that the states are able to get their loans at a reasonable rate.

Krishnan Sitaraman, a senior director at Crisil, said the impact of the 1-lakh-crore on-tap TLTRO window in ensuring the transmission of funding to end-users should be higher than earlier schemes on account of its on-tap nature as well as the fact that banks can now disburse these funds through loans and advances as well, in addition to bonds/commercial papers.

Liberalisation in risk weights for individual housing loans by removing ticket size criteria and linking it only to LTV will provide some tailwinds to housing loan disbursals from a supply-side perspective because it will bring about greater capital efficiency for lenders in housing loan disbursals of over 75 lakh ticket size, he said.

On extending the scope of the co-origination scheme to all NBFCs (non-banking financial companies) and housing finance companies (HFCs), he said this has the potential to be an effective business model to help them leverage partnerships with banks to deepen customer connect and grow their assets under management in a funding light mode.

According to Sunil Kumar Sinha, the principal economist at India Ratings, the accommodative stance clearly indicates that despite uneasiness due to the elevated retail inflation, it is in no hurry to reverse the rate cycle.

"On the contrary, it suggests that RBI is willing to wait longer for retail inflation to correct and if incoming data is going to be favourable then another round of rate cut is possible.

"A long pause on the policy rate looks like the most likely outcome since the impact of past rate cuts is still playing out," he noted.

Sameer Kaul, CEO and MD of TrustPlutus Wealth Managers (India), said, "In India, rising levels of energy consumption, increased fuel demand point to a pick-up in economic activity. Consumer confidence is also showing an uptick. Manufacturing PMI at 56.8 in Sept 2020 is the highest level seen since Jan 2012. The Governor also mentioned that we are likely to see a 3 speed recovery in India with varying pace of recovery across different sectors. According to the RBI, FY21 GDP in India may contract by 9.5% and may turn positive in Q4. Inflation is also likely to ease in Q3 and Q4FY21. Recovery in the rural economy is likely to be robust and aid the overall economic recovery. We are likely to see record food grain production this year.

"While rates have been left unchanged the RBI has announced several measures to increase liquidity and credit flow in the economy. The weekly OMO limit has been increased to 20,000 crore. The RBI is also going to conduct OMOs in State Development Loans (SDLs) for the first time to rationalize the SDL spreads over G-Sec yields. An on tap TLTRO with a tenure up to 3 years for an amount of 1 lakh crore has been announced. The increased HTM cap of 22% for SLR holdings of banks has been extended to 31st March 2022.

"In order to ensure higher credit growth even to the individuals and small businesses (i.e. with turnover of up to 50 crore), the limit for maximum aggregated retail exposure to one counterparty has been increased from 5 crore to 7.5 crore. The RBI has also decided to rationalize risk weights of new housing loans till 31st March 2022, a move that is likely to help reduce home loan rates. 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."

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