Central Bank Watch: Looking beyond the policy rate, RBI supports growth
In today’s policy announcement, while the RBI kept the policy rate unchanged – given the high inflation prints – it announced a number of measures to support growth. The announcement of the LTROs to provide durable liquidity and the CRR relief for on-lending to the auto, the housing and the MSME sector is likely to push credit growth. In an effort to improve transmission, the RBI also announced external benchmarking for medium enterprises.
In terms of the policy rate, the RBI kept its stance as accommodative and signalled that there is space for further rate cuts. Going forward, our sense is that the central bank could take the first opportunity it gets to cut rates – as soon as the inflation optics start looking better (with vegetable price spikes cooling-off) and headline inflation comes in closer to the RBI’s target band. They are likely to rely on the fact that inflation is expected to drop sharply over the next 12 months (estimate at 3.2% in Q2 FY21). We now see a high probability of a rate cut (25bps) as early as Q1 FY21 (Apr-June 2020). (For our latest analysis on inflation and monetary policy see our report: Inflation Vs. Growth, which way is the RBI likely to sway?, 5 February, 2020).
On liquidity, we expect the RBI to keep liquidity in surplus over the coming months. In our opinion, the excess liquidity in the system, along with the announcement of the LTROs, could make it difficult to justify any plain vanilla OMOs (unsterilized) and reduce the possibility of the same.
The bond market reacted positively to today’s announcement and the 10 year gained by 5 bps, trading at 6.458% at the time of writing (from yesterday’s close of 6.505%). The short-end of the curve recorded a bigger rally with bonds maturing upto 5 years seeing a 15 bps fall in their yields with the announcement of the LTROs. In the short-run, as higher inflation prints in Q4 FY20 are more or less baked in, oil prices are likely to remain contained, and the government borrowing program has been in line with market expectations, the case for a range bound movement in yields – tilted downward – seems likely.
Source- HDFC Bank’s Treasury Research Team has released a report titled “Central Bank Watch: Looking beyond the policy rate, RBI supports growth”
*Mr. Abheek Barua tweets at @AbheekHDFCBank.
Mr. Siddhartha Mohanty, MD & CEO of LIC Housing Finance said that “We believe RBI Policy announced today will ease the norms to give relief to commercial real estate developers. RBI’s decision about the extension of Date of Commencement of Commercial Operations (DCCO) of project loans for commercial real estate, will provide comfort to companies developing such projects and also their lenders. It will benefit the banks as they will not need to downgrade the asset classification, in line with treatment accorded to other project loans for non-infrastructure sector”.
Mr. Mohit Ralhan, Managing Partner & CIO, TIW Private Equity said that “RBI has continued to keep the accommodative policy stance. It has already cut the policy repo rate by 135 bps since Feb last year. However, banks have not passed the rates cut fully to customers. The decrease in requirement of cash reserve ratio for housing, auto and MSME loans for 6 months is a positive move which is likely to result in a better lending environment.”
B Prasanna, Head – Global Markets, Sales, Trading & Research, ICICI Bank sais that “The policy today is a “whatever it takes” moment for India and its policy makers. Several steps taken by the MPC are truly path breaking and shows the willingness of the Governor and the MPC to think laterally. The crowning glory of all measures is the provision of long term money through LTRO at the repo rate that is intended towards facilitating better transmission in the bond and loan markets. Besides lowering rates in the short end of the sovereign curve it is also likely to lower Corporate Bond yields, deposit rates and lending rates. Additionally, leeway provided on CRR on incremental retail loans, extending the scope of external benchmark linked loans, extension of restructuring benefits for MSMEs and commercial real estate will all go a long way towards providing much needed credit to these stressed sectors as well as help in aiding stressed projects.
Even as the MPC retains its accommodative stance and admits to further room for cut(s), it is constrained currently on the policy rate front as inflation remains uncertain and elevated. The MPC has however displayed its clear intent that several instruments are available at its disposal to support growth, ensure adequate systemic liquidity, enable better transmission and channelize better credit flow. Going forward we expect the MPC to react to an evolving growth-inflation situation. While the base case is still for a pause, probability of one cut cannot be ruled out sometime in the second half of the calendar year when inflation is likely to fall towards 4%.”
Mr. Mayank Jalan, President, Indian Chamber of Commerce (ICC) on Sixth Bi-monthly Monetary Policy Statement sais that ” ‘RBI’s repo rate has been kept unchanged at 5.15 per cent and reverse Repo rate is also unchanged at 4.90 per cent is a welcome decision and appreciated by Indian Chamber of Commerce. Holding the repo and reverse repo rate same comes in consonance with the objective of having “accommodative” stance for reviving growth. It will also stabilize the current investment amid the rising retail inflation and boost consumption. As a Chamber we expect that the holding of the rate will complement the recent measures taken by the Government to boost the economy. The policy will be conducive to achieve the medium term target for consumer price index (CPI) inflation of 4% within a band of +/2 per cent alongside growth. The decision of holding the rates same twice in a row is taken to control the surge in inflation.’