Mumbai: Reserve Bank Governor Shaktikanta Das on Friday announced that the Monetary Policy Committee has decided to leave rates unchanged. The decision was an expected one given how high inflation has persisted ever since the Covid fiasco broke out.
With this announcement, the short-term lending rate for commercial banks stands at 4 percent. The reverse repo rate is fixed at 3.35 percent. The marginal standing facility or MSF rate remains at 4.2 percent.
The decision was a unanimous one. A detailed note related to the announcement is awaited, however here are some salient observations made by the Governor 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."
Among the notable observations, the Governor observed that relative to pre-Covid levels, several high frequency indicators were pointing to an easing in contraction in various sectors of the economy and that there was an emergence of impulsive-growth.
The Governor quoted former President Dr APJ Abdul Kalam saying "You have to dream before your dreams can come true... A dream is not that which you see while sleeping, it is something that does not let you sleep."
He was referring to the growth witnessed in a Covid struck world - "Today, there is a turn in the wind, which suggests that it is not imprudent to dream of a brighter tomorrow even in the bleakest of times."
Here are more observations from the Governor and MPC:
1. On Covid: "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," Das said.
Quotes Mahatma Gandhi in his conclusion - "if I have the belief that I can do it, I shall surely acquire the capacity to do it.." This, in reference to the fight against Coronavirus. Finds rising cases of infections as a risk.
"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."
2. Agriculture: "Undeterred by the pandemic, the rural economy looks resilient. Kharif sowing has already surpassed last year's acreage as well as the normal sown area. Improved soil moisture conditions, along with healthy reservoir levels, have brightened the outlook for the rabi season. Early estimates suggest that food grains production is set to cross another record in 2020-21.
3. Consumer Sentiment: "Rising levels of energy consumption and population mobility. In cities, traffic intensity is rising rapidly; online commerce is booming; and people are getting back to offices. The mood of the nation has shifted from fear and despair to confidence and hope..."
4. Inflation: "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."
He also added, "headline inflation has moved up from March 2020 levels and has persisted above the tolerance band of the target. Our assessment is that it will remain elevated in the September print, but ease gradually towards the target over Q3 and Q4."
5. GDP: Citing the manufacturing purchasing managers' index (PMI) for September 2020 that rose to 56.8, a high since Jan'12, the Governor added that such "expectations are also reflected in our growth projections which suggest that GDP growth may break out of contraction and turn positive by Q4."
However, the speech was gloomy given the negative forecast for GDP. "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 added.
6. Recovery: "There is currently an animated debate about the shape of the recovery. Will it be V, U, L, or W? More recently, there has also been talk of a K-shaped recovery. In my view, it is likely to predominantly be a threespeed recovery, with individual sectors showing varying paces, depending on sector-specific realities. Sectors that would 'open their accounts' the earliest are expected to be those that have shown resilience in the face of the pandemic and are also labour-intensive. Agriculture and allied activities; fast moving consumer goods; two wheelers, passenger vehicles and tractors; drugs and pharmaceuticals; and electricity generation, especially renewables, are some of the sectors in this category.
7. Increment in market operations: the RBI will maintain comfortable liquidity conditions and will conduct market operations in the form of outright and special open market operations. In response to feedback from market participants, the size of these auctions will be increased to Rs 20,000 crore. It is expected that the market participants will respond positively to this initiative.
8. Additional measures:
The governor highlighted a few measures. On tap TLTRO (targeted long term repo operations) with tenors of up to three years for a total amount of up to Rs 1,00,000 crore at a floating rate linked to the policy repo rate has been announced. Banks can avail this scheme for deployment in corporate bonds, commercial papers, and nonconvertible debentures issued by entities in specific sectors over and above the outstanding level of their investments in such instruments as on September 30, 2020. The liquidity can also be extended to bank loans for these sectors.
The RBI also announced increment in SLR holdings classified as Held to Maturity (HTM) from 19.5 per cent to 22 percent of NDTL in respect of SLR securities acquired on or after September 1, 2020 up to March 31, 2021. With a view to ease secondary market operations, the Open market operations in State Development Loans has been implemented. RBI believes it would ease concerns on illiquidity, and absorptive concerns for total govt borrowing in current year.
Perpetual licenses for Payment System Operators: Payment licenses were given for a period of 5 years. Now, RBI would offer such licenses under certain conditions to new and existing PSOs.
The detailed RBI MPC note for October 2020 is available on this link. It opens a PDF document.
Although the announcement on Friday was on expected lines, the Sensex was up by 250 points to trade at 40,425 at mid-noon.
Here are opinions from experts and sector heads:
Abheek Barua, Chief Economist at HDFC Bank in a note writes: "The highlight of the policy was the RBI's signal that it would "do whatever it takes" (a phrase immortalized by former European Central Bank Governor Mario Draghi) to align risk-free government bond yields with the fundamentals of the economy. This involved key changes such as an increase in the size of Open Market Operations and innovations like OMOs in State Government Bonds. Were these measures to succeed, as we expect them to, the upward pressure on yields that have built up on the back of heavy anticipated supply of central and state government bonds, is likely to moderate."
Barua adds, "Has the RBI gone overboard in its effort to support growth? We think not. These are unprecedented times and the Indian economy's revival efforts are hobbled by the lack of adequate fiscal support. If monetary policy does have to do the heavy lifting, it cannot do it within the confines of a conventional "take-no-risks" framework. Conservatives will fret over both inflation and financial stability risks given the combination of a liquidity glut and an effective dilution of prudential norms for things like home loans. We believe it's a risk worth taking."
Anuj Puri, Chairman, Anarock Property says, "With real estate demand gradually seeing some green shoots of revival, especially in the wake of reduced stamp duty charges (in Maharashtra) and developers discounts and freebies, reduced repo rates would have given an added boost just before the upcoming festive season. But with consumer inflation still trending at the upper end of the apex bank's band, and the policy repo rate also being substantially reduced by 140 basis points in 2020, today's move was expected."
On a positive note, "RBI's move to rationalize risk weightage on home loans and linking housing loans risks only to loan-to-value is a welcome move. This announcement thus will definitely encourage banks to lend more to individual homebuyers without feeling the stress on their balance sheets. In the current.
Deo Shankar Tripathi, MD & CEO at Aadhar Housing Finance found the RBI MPC move as helpful to banks. "At present risk weight on Housing loans is based on amount of loan and LTV. Now it is linked with LTV only. Earlier all loans above 75 lac were carrying same risk weight irrespective of low LTV of loan now even big loans with low LTV will carry low risk weight. This is good for HFCs lending big ticket size loans with low LTV and also a boost to the real estate sector. Lenders will offer differential interest based on LTV as their capital requirement will be lower with low risk weight on low LTV. "
"Now HFCs are included in co-origination of loans with banks. While details are yet to be seen how this would work as in over the last 2 years co-origination could not take off. Increasing retail loan cap from 5 crore to 7.50 Cr indicates continuance of RBI's focus on retail loans," he adds.
Shishir Baijal, Chairman with Knight Frank India observed, "The growth in the economy has also been reflected in the real estate activities of the last quarter where both residential as well as commercial markets have seen a sharp increase in activities. Measures like rationalisation of risk weights to all new housing loans until March 2022 would give a fillip to housing loan growth. The RBI has also extended the scheme for co-lending to all NBFCs and HFCs which will ease credit availability for the real estate sector. Broadly these are positive and welcome steps by the RBI."
For businesses, Nish Bhatt, Founder with Millwood Kane International, finds, "Announcement on liquidity measures will help businesses looking at raising funds at a lower cost, allowing banks to lend more retail and home loans by easing norms is a step in the right direction, this allows banks to lend more and help home loan borrowers."
Does the current decision indicate an end to rate-cuts? Will the RBI hike rates in future meetings? Dr Joseph Thomas, Head of Research at Emkay Wealth observes, "There is always a constituency of market participants who want rate cuts. They will certainly be disappointed. The reports which had come up last June that the rate cut cycle is coming to an end may gain more prominence now. In our view, it is not the rate cuts but the liquidity provision that matters today, when the market rates on short term bank and corporate papers have touched low single digits. "
For financial markets, Amar Ambani of Yes Securities adds, "We believe, over time, Gsec 10-year yield will drop closer to 5%. Rationalization of risk weights on Individual housing loans, now linked only to LTVs, for all new HL sanctioned till March 2022, is a positive for banks. But HFC not mentioned may be a near-term dampener for housing finance stocks. We see the possibility of further scope of 25-50 basis points cut in Repo policy rates."
Siddhartha Sanyal, Chief Economist & Head-Research, Bandhan Bank, "Steps such as larger quantum of OMOs and OMOs in state government securities should offer cheer for the bond market, while on-tap TLTRO and rationalization of risk weightages of housing loans are meaningful steps in the right direction. We continue to expect discussion on rate cuts to be back on the table later during the year as inflation prints start softening."
Prof Krupesh Thakkar, HoD for ITM-B School finds, "The priority is surely supporting the revival of the economy. The robust rural demand on account of good monsoon will help in recovery. While that from the urban area would take some time owing to partial lockdown resulting in less aggregate demand. Though CPI has been higher than the threshold limit of 4% (+/- 2%), it is largely owing to supply disruption in food products and cost-push factors in some industries. Nonetheless, it has held the hands of RBI to go for any rate cuts. However, with economic normalization, both factors should ease out (robust agricultural crop and more people joining work), which should ideally result in CPI falling to around 4.5% in the last quarter of the current fiscal."
"So, this accommodative stance will continue till there is enough evidence of sustainable recovery in the economy. With already large liquidity being evident in the system, the further rate cut will depend on how quickly the inflation is coming down. Otherwise, there seems to be room for a few more bps rate cuts. But let us leave that for the future and see the impact of current measures," he adds.
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