“The RBI is ready to use all its instruments to address the dynamics of an unknown future. Today's trials will be traumatic but together we will triumph,” Governor Das said
Reserve Bank of India Governor Shaktikanta Das on May 22 announced a 40 basis points cut in repo rate bringing the key lending rate to 4 percent.
"The monetary policy committee (MPC) unanimously voted for a 40 basis points policy repo rate cut," he said.
The MPC voted 5:1 to reduce policy repo rate by 40 basis points, Das said adding that the decision was taken at an off-cycle meeting of the monetary policy committee which took place over the past three days.
According to Das, the day’s announcements could be divided into four categories – aimed at improving functioning of markets, to support exports and imports, to ease financial stress by giving relief on debt servicing and better access to working capital, and to ease financial constraints faced by state governments.
Key measures announced are as follows:
> Repo rate cut by 40 bps to 4 percent, Reverse Repo gets adjusted to 3.35 percent
> GDP growth outlook for FY21 seen in negative territory, some pick up seen in H2FY21
> Moratorium extension for another three months – total six months
> Accumulated interest for moratorium period can be converted into a term loan, doesn't have to be repaid immediately after moratorium ends
> Group exposure limit increased to 30 percent from 25 percent
Here is how the experts reacted to the announcements:
Speaking to CNBC-TV18, Rajkiran Rai, CEO of Union Bank of India said the extension of loan moratorium was “very much required”, adding, “Restructuring can wait as we first need to watch cash flows. However, if the restructuring is not provided, number of non-performing assets (NPAs) will rise by the second and third quarter. There is also scope for further reduction in saving deposit rates and these can come down going ahead.”
Sajjid Chinoy, Chief India Economist at JP Morgan told CNBC-TV18 that the rate cut is “in-line with estimations”, adding that cumulative rate cut so far has been 155 bps.
Stating that the rate cut is “good” as there is need to remove risk averse in the system, Keki Mistry, Vice Chairman and CEO of HDFC told CNBCTV18 that some kind of regulatory concession “like one-time restructuring, would have helped.” He added that having 20-25 percent of loans under moratorium is the industry average.
Meanwhile, Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers was also of the view that the 40 bps rate cut was in line with expectations, as was the loan moratorium extension. Adding: “The measure to convert the moratorium interest payment into a term loan payable in course of FY21 is the most important announcement. This can reduce NPA, at least in the next 12 month. The additional liquidity measures remain rather muted. The RBI also remains circumspect on growth and inflation outlook.”
Kotak Institutional Equities’ Vice President and Senior Economist Suvodeep Rakshit noted that the broader markets will focus on liquidity measures such as the path of open market operation (OMO) purchases (preferably a calendar) and regulatory measures to ensure both liquidity and solvency concerns are adequately addressed. He added: “Given the various dislocations that can emerge in the financial sector, markets will be focused on further steps by the RBI to safeguard the banking system (and broader financial system).”
Naveen Kulkarni, Chief Investment Officer, Axis Securities while noting that the rate cut would have “limited impact” in the short term, added that it would help revive growth over the longer term. “However, the decision to extend the moratorium period by another three months is a significant negative for the private banks both in the medium and long term. The impact on the banking sector will be negative,” he added.
Suman Chowdhury, Chief Analytical Officer at Acuité Ratings & Research felt that the MPC’s decision to opt for an interim 40 bps rate cut is primarily driven by an overriding concern on the severe disruption in domestic demand. He further noted that the transmission of the lower rates in the monetary system will depend significantly on the deployment of various monetary tools by RBI including direct or indirect purchase of government securities and also the ability of the banks to cut deposit rates further.
Hailing it as a “good policy,” Abhishek Goenka, Founder & CEO of IFA Global said the decision to extend moratorium and convert the interest into term loans “essentially increases the payback cycle”, while the swap facility for exim banks, extension of import payments and increasing the exporters length of credit to 15 months from one year are “steps in the right direction to ease the liquidity situation.
“The RBI is ready to use all its instruments to address the dynamics of an unknown future. Today's trials will be traumatic but together we will triumph,” Das added.
This is the governor's third such press conference since the coronavirus pandemic and subsequent lockdown in March. In the first two pressers on March 27 and April 17, the RBI governor announced a series of measures to ease liquidity pressure in the banking system and cushion the economy from the Covid-19 shock.
This is also the central bank head's first media address after Finance Minister Nirmala Sitharaman concluded the fifth and last tranche of the Rs 20 lakh crore financial stimulus package announced by Prime Minister Narendra Modi.
Check our complete coverage on RBI's May 22 announcements here