RBI’s monetary policy stance ‘prudent’: India Inc.

The Reserve Bank of India governor, Shaktikanta Das, in the central bank's latest policy update said its Monetary Policy Committee (MPC) has decided to keep policy rates unchanged. The repo rate is maintained at 4% and reverse repo rate still stands at 3.35%. Das said the bank's accommodative policy stance will continue.

The repo rate—which is the rate at which a central bank lends money to other banks—was cut by 115 basis points since March 2020, a step the RBI had then said became necessary to take in order to weather the economic shock wrought by the Coronavirus pandemic. Today is the fourth time the central bank chose to stick with the existing policy status quo.

India Inc. has reacted to the monetary policy update. Here are some key reactions.

The RBI policy announcement today is an acknowledgment and continuation of doing whatever it takes to maintain an orderly, seamless and non-disruptive liquidity management policy to support debt management. Towards this end, an extension of enhanced HTM limit, relaxation of funds availability under MSF, an extension of on tap TLTRO to NBFC, deduction of credit disbursed to ‘New MSME borrowers’ from their NDTL for calculation of the CRR will calibrate credit flow and liquidity management. Allowing retail participation in the G-Sec market is a bold step towards the financialization of a vast pool of domestic savings and could be a game-changer. Furthermore, deferment of the implementation of the last tranche of Capital Conservation Buffer and the Net Stable Funding Ratio by another six months is a well-intentioned move which is crucial for banks, especially the not so strong ones to stay afloat in the current environment. Overall, a thoughtful policy and a thoughtful budget could just be the ideal mix for rejuvenating growth in the current pandemic.

The RBI’s plan for reviewing the regulatory framework for microfinance is a most welcome step.

The Malegam committee on microfinance, about ten years back, played a huge role in strengthening the foundations of the Indian microfinance industry with setting up of policy contours around a host of areas including lending process, pricing of interest rates, increasing transparency, capital and provisioning norms, and reducing the problems of multiple lending and over borrowing.

Since then, the industry has significantly consolidated its position with strong last mile credit delivery and helping income generation and employment at the bottom-end of the pyramid.

Since over a decade has passed since the Malegam committee, a fresh and comprehensive review of the sector will certainly be a timely and relevant initiative towards harmonizing the regulatory framework for the industry for various kinds of entities that can be followed uniformly across the country. This will put the industry in a position of further strength to help millions of poor Indian households with better risk mitigation and stronger financial inclusion.

In line with market expectations, the Monetary Policy Committee voted unanimously to keep key rates unchanged. The stance continued to be accommodative as long as it is necessary to support growth as the economy comes out of the pandemic.

High frequency data shows the economy recovering across sectors. GDP growth for FY21-22 has been pegged at 10.5%. CPI inflation has been projected lower at 5.2% this quarter (5.8% earlier) and at 5 to 5.2% for H1. RBI assured adequate liquidity to ensure that government borrowing is completed in a “non-disruptive“ manner.

A slew of positive measures were announced including allowing individuals to open accounts with RBI for Gilt purchases.

Coming after a growth-oriented budget, the monetary policy stance augurs well for economic growth. Expect rates to be stable with an upward bias depending on inflation trajectory.

As expected, the MPC voted unanimously to leave the policy repo rate unchanged at 4% and assured continuation of accommodative stance well into FY22. This will complement the measures taken by the Govt in the recent budget to revive growth momentum in the economy. Despite the expansionary Budget, support from RBI is needed at this juncture to strike the right balance in ensuring enough liquidity in the system. Thankfully the RBI Governor time and again in his speech assured comfortable liquidity in the banking system going ahead. Overall the policy outcome was largely on expected lines and did not provide any large surprises on either side.

RBI expectedly kept the policy rates unchanged and maintained accommodative stance. The Governor’s emphasis on opening TLTROs to NBFCs had been mentioned for the first time, to support stressed sectors. This reiterates the systematically important role of NBFCs in India's financial system in driving sustainable economic recovery and growth. MPC projected that Inflation is expected to remain in comfortable level. The Governor assured that the policy will remain pro-growth to support and drive economic recovery. The special support that is being given to MSMEs in credit extension reflects this assurance.

Under the given market scenario and circumstance , the RBI’s direction on unchanged repo rate is very much on the anticipated lines, though a rate cut would have been better to combat the negativity of pandemic led economic crisis across the industry. As the economy is gradually opening up and getting back on track to restore the lost momentum, the regulator has indeed brought innovative liquidity injection measures to maintain the policy stability and ensured that additional liquidity is provisional. It is extremely important for the regulator to balance its borrowings from the market so that it doesn’t jeopardize the financial stability and disrupts other market players.

The new policy’s paramount objective of economic revival were addressed by announcing an innovative measures like enhancing liquidity by allowing NBFC to tap TLTRO on tap scheme, allowing additional credit for small MSME borrower’s up to Rs 25 lakhs, exemption to FPI investment in defaulted corporate bonds to boost further investment in recaptured economic revival and firming up consumer protection. The observation that sales and new launches of residential units in major metropolitan cities reflect a renewed confidence in the real estate sector’ reinforces the need for further positive booster dose to strengthen its core revival that enacts a multiplier effect on 270 allied industries.

RBIs decision of keeping the repo rates unchanged and maintaining an accommodative stance will provide the much needed support for the nascent recovery of the economy during 2021. The initial green shoots of recovery are already visible and is expected to gain strength in the coming quarters. This decision by the Central Bank is in sync with government’s recent Union Budget which emphasised on augmenting capital expenditure while keeping the fiscal targets at bay in the short term.

The easing of retail inflation to 4.9% in December 2020 and expected benign outlook has provided the elbow room to maintain the policy rates and support a sustained recovery of the economy. RBI’s expectation of GDP growth at 10.5% during FY 2021-22 indicates growth in jobs and incomes.

The status quo on the policy rates is a welcome step for the homebuyers as they can take advantage of the prevailing lowest mortgage rates. Banks and Housing finance companies are expected to increase mortgage lending due to stable interest rates and comfortable liquidity environment. The demand for housing, which has shown initial signs of recovery in the latter part of 2020, is expected to sustain if the favourable interest rates and price incentives by real estate developers are further supported by economic recovery and improved job scenario.

As expected, the repo rate and the reverse repo rates remained unchanged while maintaining an accommodative stance. 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 115 basis points since February 2020, RBI kept the rates on hold, with an eye on how the inflation and the economic recovery pans out in the coming months. Advance estimates indicate that the Indian economy may contract as much as 7.7% in FY2020-21 due to the pandemic.

In such a scenario, one would usually expect RBI to cut repo rates in order to boost consumption. Certainly, the real estate industry always aspires for reduced interest rates. Housing demand is reviving, and this demand needs to be fostered. However, the RBI's current stance is absolutely justified, given the unique circumstances. We are certain that rates will be adjusted favourably once the pandemic exigencies ease.

In a big positive, extension of DCCO of project loans for commercial real estate is permitted to be extended by a year without downgrading asset classification. This will give major relief to cash-starved developers and will also provide a breather period for maintaining and managing their cash flows.

The latest MPC review comes on expected lines. As expected, the repo rate and the reverse repo rates remained unchanged while maintaining an accommodative stance. But the market still has a number of concerns, particularly of, a high inflation and overall economic distress. With the government planning a robust economic recovery, the real estate market is dependent on a lowered interest rate scenario. Thankfully, the demand for housing is already on the rise. This should compensate for the latest review. Going forward, the market is bound to revive on the basis of current positive consumer sentiment.

The announcement by the RBI Governor on inclusion of NBFCs in the on tap Targeted Long Term Repo (TLTRO) Scheme of the Government will be a much needed fillip for the NBFC sector after it had been reeling from a liquidity crunch since the IL&FS default in 2018 which was exacerbated by the pandemic. This is a great growth oriented and stabilising measure and in line with the NBFC sector’s demands, instead of trying to stem the liquidity to address inflation concerns.

We found the MPC’s decision and the RBIs actions prudent. The RBI seems confident of the economic recovery. This should lead to a slow and gradual normalization of monetary policy.

The move to hike CRR back to 4% now and the introduction of variable reverse repo in January is indicative of the RBIs stance of gradually managing the excess liquidity infused in 2020 to fight COVID.

Although we do not see any immediate rate hikes, but over the course of the year, if growth recovery sustains, we wont be surprised to see the RBI move the overnight rates from the Reverse Repo Rate of 3.35% to the Repo Rate of 4.0%.

Bond Markets are getting adjusted to this reality that the RBI will also tolerate higher bond yields than what it did last year. As we wrote post budget, that bond yields and interest rates in general are headed higher.

However, the RBI will try and calibrate the rising yields and will tactically use Open market Operations to smooth out the market volatility.

Returns on overnight and liquid funds may improve. Long Bond funds may have already seen the best of the times.

Keep your investment duration short.. Short term fixed deposits, short term funds. For those who can withstand short term volatility in returns, dynamic bond funds can be considered

The move to allow retails investors to directly participate in government securities seems to be a good one. However, we continue to believe that safe debt mutual funds, etfs and fixed deposits remain better options for retail investors

In line with BWR’s expectations, the MPC has continued with its accommodative monetary policy stance and held the policy rates unchanged, stressing that the need of the hour is to back growth. The economy is picking up and the demand for credit is likely to improve gradually. As expected, towards rationalisation of excess liquidity from the system, a phased hike in CRR for restoration to 4% , the pre Covid level, has been announced. However, MPC also cautioned about the rise in inflation that could arise from cost-push pressures and rising petroleum prices. Allowing retail investors to access the GSec market is an interesting and welcome move which may ease the government's fundraising program and help in deepening the bond market. The effectiveness of this will depend upon attractiveness of the bonds to the retail investors. In any case, we do not expect this to make any significant impact on the bond yields in the near term. The extension of on tap TLTRO to NBFCs for incremental lending to specified stressed sectors has come at a right time and will have multiplier effects on growth.

The key takeways include normalization of CRR in two-phases, reduction in SLR requirement and deferment of implementation of 0.625% of capital conservation buffer. Banks can deduct credit disbursed to new MSME borrowers from NDTL, for CRR calculation. This should give a boost to further lending to MSME sector.

RBI has been maintaining accommodative stance as the economy is in the recovery mode but still there is some uncertainty around the risks related to COVID-19. The commentary on expected double digit GDP growth in FY-22 is extremely encouraging and in-line with what we are also witnessing on the ground in our companies. The opening up of government bond markets for retail investors directly through the reserve bank is a far-reaching positive step which will help both the government and the retail investors.’

RBI remains a major buyer of $ in both spot and derivatives market and that is not allowing the Rupee to appreciate inspite of record foreign capital inflows and speculative long positions in the Rupee. A constructive Union Budget, balanced monetary policy and benign global environment may mean that Rupee may remain strong. Over the medium term it may test 72.50 levels.

The MPC has once again maintained the status quo by sticking to an accommodative stance on the interest rate front which is inline with expectations, however, there are a couple of major breakthrough decisions which have been taken to supplement a massive Government borrowing program. The RBI has opened its doors for retail investors to directly invest in Government securities online which will place them in direct competition to other banks for attracting retail savings deposits. The inflation estimates are a positive surprise and the expectation that the inflation will be well within the tolerance levels is also cheery for the markets and economy as a whole. Easing liquidity concerns for NBFCs is a welcome step while the normalization of CRR levels by end of this quarter signals that the RBI has given its reassurance that all will be well under control in FY 21-22.

RBI as expected has kept the monetary policy rates unchanged and reiterated its stance of accommodative monetary policy. RBI has also stated yield curve is a public good, this is the reiteration of its stance. However, market players was disappointed as they expected specific measures like increase in HTM limits, OMO calendar. How the market behaves will depend upon how RBI follows with its statement. RBI governor has stated the CRR hike would allow them to do more measures to see to it that the borrowing programme goes of smoothly. This may be a tussle between the bond markets traders and RBI , if RBI does not do convincing measures, traders would take the yield higher.

Policy rates being unchanged is on the expected lines with inflation being within the range of 4% to 6%. Even in the next policy review, it is not expected to be changed since the inflation projection for first half of FY 22 is also within the range and more importantly the target is also expected to be retained at the current 4% with +_ 2%. The GDP growth expected by RBI is 10.5% which is almost on similar lines as expected by IMF and others institutions. The permission to permit retail investors to directly open accounts with RBI to trade G secs is expected to ease government's fund raising.

The MPC unanimously decided to retain all policy rates at status quo while also retaining the liquidity stance as “accommodative”. Further liquidity management and normalisation is now likely to be graded and gradual to prevent any market disruption or impair financial stability. CRR which was to be restored back to 4% from the temporary 3% introduced in March 2020, is now to be done in a 2 phased manner by 50 bps each in March 2021 and May 2021. RBI has reiterated the availability and keenness to use all policy tools to meet liquidity gaps if necessary to allay any yield spike fears.

Relaxation in HTM limits on SLR securities which was raised to 22% (in March 2020) for banks from 19% earlier will now continue for another year until March 2023. This should help in managing the borrowing program smoothly. Besides steps allowing retain investors to open direct accounts with RBI to buy/invest in Govt bonds, which should also help in improving and creating sticky demand over time. RBI’s clear recognition that yield is a ‘public good’ benefitting everyone, is a positive which is likely to an actively managed curve especially given the expansion in government borrowing program.

Inflation forecasts for Q4 -FY21 and for the first half of FY 2022 and Q3 -FY 22 have been revised marginally probably to factor in return of growth recently and also the growth supportive budget, even as inflation prints have softened recently. Markets expectation for an OMO calendar did not come through which is causing some nervousness in the backdrop of an all time high borrowing program for the next financial year.

We would continue to focus on shorter term products within Banking & PSU and Corporate bond fund categories, post today’s policy and the recent budget.

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