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RBI Governor (ANI)
RBI Governor (ANI)

Economists welcome RBI rate pause amid COVID-19 related uncertainties

  • The six-member Monetary Policy Committee (MPC) left the repo rate unchanged at 4 per cent while trajectory of economic growth, inflation, and external demand continues to be uncertain
  • Multiple firms praised RBI's decision as there will be an ease in pressure on corporate and individual borrowers

MUMBAI : Economists on Thursday welcomed the Reserve Bank's decision to keep the policy rate unchanged as uncertainties around growth and inflation continue to remain amid the COVID-19 pandemic.

The six-member Monetary Policy Committee (MPC) left the repo rate unchanged at 4 per cent and decided to continue with the accommodative stance as long as necessary to revive growth, while ensuring that inflation remains within the target.

"The decision to hold the policy rate was correct as the trajectory of economic growth, inflation, and external demand continues to be uncertain. The calibrated approach is in consonance with evolving situation while keeping enough headroom for future," SBI's Group Chief Economic Adviser Soumya Kanti Ghosh said.

On the macroeconomic front, the outlook for growth continues to be negative, with RBI refraining to give any number regarding GDP contraction on account of COVID-19, he said.

India Ratings & Research's Principal Economist and Director (Public Finance) Sunil Kumar Sinha said the spike in retail inflation lately has made the MPC go for a pause on the policy rate.   

"As the economic recovery is still fragile and may continue to face sporadic turmoil going ahead, we believe it will require sustained support from the RBI in terms of all the policy levers -- repo rate, liquidity and regulation," Sinha said.

He, however, said this pause is not the end of the rate cut cycle. The earlier policy rate cut and the extent of its transmission into the economy will be an important monitorable for RBI to decide the quantum of policy rate cut going forward, given that the space available to do so is quite limited, he added.

DBS Group Research Economist Radhika Rao said while the overall assessment was accommodative, in the near-term the MPC will stay guarded, which is also backed by the three-month households' inflationary expectations. 

She expects inflation to ease towards the fourth quarter of 2020 as COVID-19 related impact fades and favourable base effects resurface, which might provide a window to resume easing if economic activity remains subdued.

"We maintain our expectation for another 50 bps this year, marking the bottom of the rate cutting cycle," Rao noted.

Care Ratings Chief Economist Madan Sabnavis said the MPC stated that the space for further monetary action remains but it needs to be used judiciously to get the maximum benefit, justifying the accommodative stance.

However, the primary mandate in inflation targeting and the outlook being uncertain for the same, a pause is in order as the previous rate cuts are still working their way through, he said.

According to Deloitte India's Economist Rumki Majumdar, with inflation expected to remain high owing to intermittent regional and local lockdowns leading to supply-side disruptions, the RBI has opted for status quo.

"The RBI's dynamic, proactive, and balanced approach is in line with our expectations that the central bank will be looking at alternate measures such as forward guidance and maintain sufficient liquidity," she said.

KPMG India Partner and Head (Financial Risk Management) Rajosik Banerjee said there will be an ease in pressure on corporate and individual borrowers, given the window of restructuring is now available upon meeting certain criterion.

"It is extremely important that this regulatory forbearance has incorporated necessary safeguards like prudent entry norms, clearly defined boundary conditions, specific binding covenants, independent validation and strict post-implementation performance monitoring," Banerjee said.

This will ensure that these restructurings are administered and monitored well, and do not create an asset quality issue at a later date, Banerjee added.

Essar Ports Managing Director and CEO Rajiv Agarwal said the resolution framework for COVID-19-related stress, which enables the lenders to implement a resolution plan for eligible corporates, is a step in the right direction.

TrustPlutus Wealth Managers (India) Private Ltd's MD and CEO Sameer Kaul said the MPC is open to further monetary policy action but would like to use the dry powder judiciously keeping in mind the near term view on inflation.

More than the policy rates, it is the additional measures announced by the RBI that are a welcome move and shall aid economic recovery, he said. 

RBI has also increased the loan-to-value ratio of gold loans to 90 per cent from the existing 75 per cent.

"While this move is positive from a credit standpoint, it is negative from the point of view of the lender since it increases the risk of the lender not being able to auction the security and recover the money due to lower margin of safety," Kaul said.

This story has been published from a wire agency feed without modifications to the text.

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