INSTANT VIEW 4-India's central bank keeps rates steady

BENGALURU, Aug 6 (Reuters) – India’s central bank kept interest rates on hold on Thursday, amid a recent rise in retail consumer prices and said it would ensure inflation remains within target going forward.

The repo rate currently stands at 4.0% and the reverse repo rate at 3.35%.

Two-thirds of analysts in a Reuters poll had predicted a 25 basis point cut in the repo rate, while the rest saw no change.

COMMENTARY ANAGHA DEODHAR, ECONOMIST, ICICI SECURITIES, MUMBAI “In the current environment, the ability of monetary policy in stimulating demand is limited. This is evident from the fact that despite significant rate cuts since the onset of COVID-19, credit growth has been falling consistently.”

“Also, real rates are in the negative territory, disincentivising savers. Hence, it is no surprise that the decision to pause was unanimous.”

“However, the Reserve Bank of India (RBI) took a series of measures outside the purview of the Monetary Policy Committee (MPC) – the most important among them being corporate restructuring. It also increased LTV for gold loans and introduced additional liquidity facilities for NHB and NABARD. We expect the regulatory policies to have favourable impact on targeted sectors.”

SHASHANK MENDIRATTA, ECONOMIST, IBM, NEW DELHI “Today’s decision highlights the RBI’s preference for conserving policy space and use it judiciously. However, the next window for cut will either be in October or December, which is a belated rate action amidst current demand contraction.

“Meanwhile, the central bank also announced extension of restructuring mechanism for stressed MSME borrowers. This is positive as COVID-related disruptions have impacted their cash flows, warranting further help.”

SUMAN CHOWDHURY, CHIEF ANALYTICAL OFFICER, ACUITÉ RATINGS & RESEARCH LTD, MUMBAI “The MPC’s decision to hold on to the existing rates appears to stem from its belief that the short-term inflation outlook will be uncertain due to supply constraints and cost push factors. The MPC statement also highlights its intent to track the inflation trend closely so as to ensure timely action as and when appropriate”

“While the repo rates are almost close to the bottom, we believe there is a possibility of another round of 25-50 bps of rate cut over the next six months. RBI has announced… an expert committee that will lay down the principles for corporate debt restructuring steps amid credit concerns due to the pandemic. This is critical to impart credibility and transparency to any debt resolution that may be undertaken by the banks without any downgrade from the standard asset category.”

ANAGHA DEODHAR, ECONOMIST, ICICI SECURITIES, MUMBAI “In the current environment, the ability of monetary policy in stimulating demand is limited. This is evident from the fact that despite significant rate cuts since the onset of COVID-19, credit growth has been falling consistently.”

“Also, real rates are in the negative territory, disincentivising savers. Hence, it is no surprise that the decision to pause was unanimous.”

“However, the RBI took a series of measures outside the purview of MPC – the most important among them being corporate restructuring. It also increased LTV for gold loans and introduced additional liquidity facilities for NHB and NABARD. We expect the regulatory policies to have favourable impact on targeted sectors.”

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI “Rate decision and loan restructuring were mostly on the expected lines. Prima facie this is a positive thing, our experience with earlier loan restructuring has been that sometimes it becomes like kicking the can.”

“The kind of asset quality deterioration which was supposed to manifest in the near term might take a longer period of time. That is one concern which remains. Second, the governor didn’t talk about the fact that the banks are not lending. While restructuring can be one rival for loan growth beyond that we didn’t many measures which would actually make the lending growth accelerate. Otherwise there has been broad range of measures.”

“Not much clarity was provided over the key problem about the credit growth acceleration. Next policy decision will depend on how the inflation is behaving and whether the lockdown restrictions are being removed.”

NAVEEN KULKARNI, CHIEF INVESTMENT OFFICER, AXIS SECURITIES, MUMBAI “The RBI continues to maintain good liquidity in the system which is encouraging. The markets have reacted positively, especially the Bank Nifty which is reacting to the recasting and restructuring of loan profiles.”

“The increase in LTV for gold is positive and also drives priority-sector loans, which will help growth. LTV for advances against gold loans increased to 90% from 75% – positive for gold financiers. Overall, it is positive for the financial services system.”

PRITHVIRAJ SRINIVAS, CHIEF ECONOMIST, AXIS CAPITAL, MUMBAI “This policy stance was backed by dovish guidance from the RBI governor. He stated there is space to cut policy rates but prefers to use it judiciously, most likely when there is more comfort on food inflation later this year.”

“We continue to see 50-100 bps in rate cuts in the current cycle. Today’s policy statement focused on the impact of RBI’s monetary and liquidity policy so far. It opened a new targeted liquidity window for small financiers.”

“In addition, banks saw relief due to forbearance allowed for stressed assets under a new resolution mechanism, but with conditions attached to ensure appropriate use. Overall, this was a policy that focused on tweaking existing frameworks to ensure financial system stability.”

RUPA REGE NITSURE, GROUP CHIEF ECONOMIST, L&T FINANCIAL HOLDINGS, MUMBAI “The policy is balanced and in right direction. While conserving the rate reduction space for later use, the MPC has continued to provide the support on the liquidity front. Doing away with the loan moratorium and announcing a responsible scheme for restructuring of the stressed assets are both prudent and wise from the perspective of financial stability.”

GARIMA KAPOOR, ECONOMIST – INSTITUTIONAL EQUITIES, ELARA CAPITAL, MUMBAI “Taking cues from the recent high inflation prints, the MPC decided to keep policy repo rate unchanged at 4% while maintaining an accommodative stance. While it is clear that the recent rise in inflation print to above 6% is transient and a reflection of supply related disruptions and not revival in demand, MPC’s legal mandate compelled it to hold rates.”

“While today’s decision has come as a surprise to us, we believe slack in the economy amid easing inflation rate will provide MPC space to cut policy rate by 25-50 bps in H2FY21. The RBI looks keen to preserve its ammo for H2FY21, should growth show incremental signs of faltering. “

SHILAN SHAH, SENIOR INDIA ECONOMIST, CAPITAL ECONOMICS, SINGAPORE “Our view is that inflation will drop sharply over the coming months as the collapse in demand more than offsets supply constraints. More importantly, the outlook for economic growth is bleak as confirmed coronavirus cases continue to rise. Several high-frequency indicators such as the July PMIs show that the post-lockdown recovery has stalled before it ever really got going.”

“All of this augurs for further policy loosening. Indeed, the RBI has maintained its “accommodative” policy stance today and Governor (Shaktikanta) Das stated that further policy space is available. We are still forecasting a further 50bp of cuts before the end of the year. Policy could be loosened even further if the growth outlook continues to worsen.”

KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU “The MPC was unanimous with the decision to hold rate unchanged at 4%. Expectedly, the accommodation stance is retained as well, as the economy is showing signs of weakness despite exiting from the lockdown.”

“As we have been saying, surging inflation will flatten the recovery curve, the RBI governor too stated that “surge in COVID-19 cases has subdued early signs of revival.”

“He also endorsed our view of supply chain disruption impacting inflation. Not surprisingly, the central decided to wait for inflation to cool before taking further action to boost a fragile economy. Like us they expect inflation to cool off during 2HFY21 which raises a probability of a rate cut during 4Q20.”

UPASNA BHARDWAJ, SENIOR ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI “MPC’s caution on uncertainty on inflation trajectory suggests that chances of further easing will henceforth remain a function of the evolution of supply-side shocks. We see the next few readings still elevated near 6% and hence we do not see any rate easing in at least the October meeting.”

“On a positive note, the other regulatory and development measures announced today will go a long way in ensuring financial stability.”

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