In December, the Reserve Bank of India’s monetary policy committee surprised the markets by leaving rates unchanged when economists had forecast a cut. Much has changed since and this time around the expectation is that the MPC will hold tight while leaving its accommodative stance unchanged.
The obvious reason is the sharp rise in retail inflation in the past two readings. A second reason why the MPC will hold rates is that transmission is still a sorry story. Finally, the spreading Coronavirus epidemic is adding another element of uncertainty. Thus there is every reason to believe that the MPC will choose to retain its accommodative stance.
Stay with us as we bring you LIVE updates from the RBI's MPC meet today.
Piyush Baranwal – Executive Vice President - Senior Fund Manager (Fixed Income), YES AMC.
"Removal of CRR requirement on incremental credit to retail loans for automobiles, residential housing and loans to MSMEs, extension of one-time restructuring scheme for MSME advances and 1-year extension allowed for date of commencement of commercial operations of project loans to commercial real estate should all help alleviate funding woes of these crucial segments of the economy. Similarly, LTROs, new floating rate loans allowed for Medium Enterprises and CRR forbearance on incremental credit to retail loans for automobiles, residential housing and loans to MSMEs should improve monetary transmission to crucial industry segments which are currently struggling. Overall, today’s policy should hopefully help start the virtuous cycle to pull Indian economy out of its current morass," said
Ashok Mohanani, Chairman EKTA World and Vice President NAREDCO Maharashtra.
"The overall real estate sector will see stability in terms of investment and purchase behavior. With this the infrastructure prices are likely to remain stagnant which will keep the prices stable for real estate sector. Though the marketers were expecting a cut in the repo rate along with the restructuring in loans after the Union Budget 2020, the unchanged repo rate will have steady growth in the sector at large. Another impetus for homebuyers will be the CRR leeway for existing and incremental loans will help the stimulus package announced,” said
Pankaj Bobade, Head- Fundamental Research, Axis Securities.
"Overall, it’s a ‘dovish’ policy, with an expansionary policy stance indicating that the RBI is unlikely to hike rates in the near-term," said
Anagha Deodhar, Economist, ICICI Securities.
"Firstly, the RBI announced long term repos in the1 to 3 year window up to Rs 1 trillion. This led to short term yields falling by 15-20 bps and it was as good as a rate cut. Secondly, it announced that banks won’t have to include incremental loans to auto, housing and MSME sectors during Jan-Jul 2020 in their NDTL for CRR calculation. This again is like a marginal and temporary CRR cut and is likely to boost bank credit to the said segments. These measures together are like a stimulus for the economy although the repo rate was kept unchanged,” said
said Manju Yagnik, Vice Chairperson Nahar Group and Vice President NAREDCO (Maharashtra)
"The decision to extend the date for commencement of commercial operations with regards to project loans for commercial real estate, would complement the initiatives for the real estate sector taken by the government last year. I would like to add here that RBI had reduced the repo rate by a cumulative 135 basis points in 2019, and it’s important that the central bank ensures proper transmission of the rate cut by banks to reduce the EMI load of the consumers. Not only this, it will also make home loans more accessible for consumers, thereby boosting housing demand. There's also a need to bring in measures to boost credit supply from banks and NBFC sector for developers,”
SBI says policy decisions to be beneficial.
Rajnish Kumar, Chairman, SBI said, "The RBI policy is a statement of intent carefully using a repository of policy novelties to address the current delicate balance of growth and inflation. While the decision to keep rates on hold was universally anticipated, the RBI bouquet of developmental and regulatory steps is a positive surprise to the financial ecosystem. The decision to allow Long term repo operations for 1yr and 3yr for total amount of Rs 1 trillion at policy repo rate will bring down cost of funds for banks and will facilitate better transmission within the current constraints of downward rigidity of deposit rates. Exemption of CRR maintenance for all additional loans given for retail loans for automobiles, residential housing, and loans to MSMEs is positive for banks, auto sector, residential housing and MSMEs will also help to lower cost of funds. Extension of date of commencement of commercial operations (DCCO) of project loans for commercial real estate by another one year without downgrading the asset classification will allow the real estate sector to focus on project completion. Extending the date of restructuring of MSME advances will also help the sector to navigate the current business downturn and is a logical corollary of budget announcement.”
Murthy Nagarajan, Head - Fixed Income, Tata Asset Management.
"RBI in its press conference, stated policy action will be taken in the second half of the financial year if CPI projection evolves as per their expectations. RBI has also stated its Open Market Operations is done to bring down the corporate bond yields. The objective is to bring the benchmark down and induce banks to lend more.The statement on developmental and regulatory policies has gained importance for the bond market in the present budget. RBI is introducing long term repo in one year and 3-year upto one lakh crores at the current benchmark repo rates. This will give assured liquidity to the banks for extending loans for this tenure. This framework allows banks to invest in short term G sec and corporate bonds and exploit arbitrage opportunities. RBI monetary policy is co ordinating with the budget, with relaxed guidelines for SME and real estate sector, to boost lending and restructure loans to SME and developers."said
Markets see upward swing
. The benchmark indices continued its upward momentum for the fourth consecutive day on February 6 with Nifty ended above 12,100 post RBI kept the repo rate unchanged at 5.15 percent.
At close, the Sensex was up 163.37 points at 41,306.03, while Nifty was up 44.50 points at 12,133.70. About 1,366 shares have advanced while1,077 shares declined, and 172 shares are unchanged.IndusInd Bank, Eicher Motors, Zee Entertainment, SBI and Bajaj Finance were among major gainers on the Nifty, while losers were Tata Motors, Cipla, Infosys, Titan Company and ITC.
Economists and financial experts have welcomed RBI's widely expected status quo on repo rate, and other announcements to spur economic growth and ensure money supplies effectively.The RBI's MPC kept the key policy rate unchanged at 5.15 per cent. This follows a cumulative 135 basis points (bps) cut in repo rate since February to December 2019.
CARE Ratings said that theRBI has indicated that there could be rate cuts going ahead but would be data dependent. It added that in the April policy going by the RBI’s forecast inflation would still be high at 5.45 percentand may not merit this move.
"It is more likely this would be in course of the year as inflation numbers become more favourable. The growth projection for next year is similar to what the Budget and Economic Survey have spoken of; but one may have to wait for the second half to see a more prominent push to growth. We could expect another 25-50 bps rate cut during the course of FY21 which however will be data dependent," said CARE Ratings.
Banking stocks jump after RBI decision
Banking stocks, including IndusInd Bank, RBL Bank, State Bank of India and Yes Bank, jumped up to 5 percent in intraday trade on February 6 after the monetary policy outcome of the Reserve Bank of India (RBI).The central bank said it actively engaged in revitalising the flow of bank credit to productive sectors having multiplier effects to support impulses of growth.
Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance said that overall, the policy has been positive for the bond markets with bond yields easing (especially at the shorter end). The RBI recognized that there is monetary policy space for future action, but it will be data–dependent. He said that the yield curve could steepen a bit, with short term yields easing more than long term yields. From an investment perspective we continue to prefer the shorter to medium term part of the yield curve, added Reddy.
System liquidity is in surplus
Overall liquidity in the system remained in surplus in December 2019 and January2020. Average daily net absorption under the liquidity adjustment facility (LAF) amounted to Rs 2.61 lakh crore in December 2019. RBI data showed that in January 2020, the average daily net absorption ofsurplus liquidity soared to Rs 3.18 lakh crore. The Reserve Bank conducted four auctionsinvolving the simultaneous purchase of long-term and sale of short-term governmentsecurities under open market operations (OMOs) for a notified amount of Rs10,000 crore eachduring December and January (December 23 and 30, 2019 and January 6 and 23, 2020).
Rajiv Sabharwal, MD and CEO, Tata Capital said that as bank deposits have grown more than bank credit resulting in surplus liquidity which will make transmission more effective. Sabharwal added that incentivising bank credit to specific sectors and external benchmarking of loans for medium enterprises will further support growth momentum in the economy.
RBI governor Shaktikanta Das said that although monetary policy action is constrained at this juncture by the inflation outlook, these pressures should ease going forward. In such a situation, Das added that the RBI has several other instruments to address the challenges to growth by improving monetary transmission as well as by incentivising the flow of bank credit to productive sectors of the economy.
RBI said that monetary transmission across various money market segments and the privatecorporate bond market has been sizable. As against the cumulative reduction in the policyrepo rate by 135 bps since February 2019, it said that transmission to various money and corporate debtmarket segments up to January 31, 2020 ranged from 146 bps (overnight call money market)to 190 bps (3-month CPs of non-banking finance companies).
The minutes of the MPC’s meeting will be published by February 20.The next meeting of the MPC is scheduled during March 31, April 1 and 3, 2020.
A K Das, Managing Director & CEO, Bank of India said that notwithstanding unchanged policy rates, introduction of term repo opens up ways to transmit the signal rate changes. He explained that measures like DCCO extension for realty, MSME window expansion for restructuring and CRR exemption for incremental funding to key segments are growth oriented and promise to provide the much needed impetus to bank lending. As such, Das said that the markets have given a thumbs up to the new initiatives.
Future rate chances low?
Kotak Institutional Equities in a report said that they do not see a rationale for a rate cut in the near term based on the current outlook given that favorable inflation prints (closer to 4%), if any, will be visible only in Q3FY21. It said thatinflation expectations will be on the higher side given its adaptive nature, and growth outlook is unlikely to change significantly.
"Given our GDP and inflation estimates over the medium term, space for lower rates still remain but a strict adherence to the inflation targeting framework will restrict an action immediately. However, status quo on policy rate will, to some extent, be compensated by revised liquidity management framework leading to lower market interest rates," said the report.
In continuation of efforts to facilitate interoperability of government securities depositories,as announced in the Union Budget 2019-20, RBI said that it will modify its Governmentsecurities registry (the PDO-NDS system) to include constituent details in the ConstituentSubsidiary General Ledger (CSGL) accounts. This is expected to fuel interest of retailinvestors to invest in government securities. The upgrade is expected to be made operationalby end of July 2020.
Real estate sector to benefit?
Rohit Poddar, Managing Director, Poddar Housing and Development said thatRBI maintaining a status quo with an ‘accommodative’ stance with adequate policy space availability is a positive news for the overall economy. The real estate sector was expecting some stimulus after a subdued Budget.Poddar said that the RBI has extended the timeline of the commencement for commercial operations for project loans, which is a big relief for the commercial segment of the real estate sector.
"With the output gap moving to negative and liquidity remaining surplus in Dec'19 and Jan'20, impact realization of fresh credit for developers and reduced home loan rates will complement the initiative to increase the borrowing ratio to GDP. These measures will further help in propelling the consumption-led economy," added Poddar.
The Budget introduced several measures to provide an impetus to growth, which also gave RBI an opportunity to focus more on inflation and stability of the currency as the outlook for inflation is highly uncertain at this juncture.
Dhiraj Relli, MD & CEO, HDFC Securities said that a sharp rise in retail inflation in the past two readings and inadequate transmission of rates by banks seems to have influenced this decision. Going by the Households inflation expectation survey, he added that the three-month and one-year inflation expectations are on the way down and may influence MPC decision in H2CY20.
Experts point out that the central bank had little legroom for cutting policy rates. They highlight that as the Budget 2020 is out now, the RBI has tried to maintain a balance in growth and financial stability.
“We are delighted with the MPC stance that has taken note of the concerns of the real estate sector making significant announcements today. With the lower provisioning requirement for retail loans extended to housing segment, we hope that the new measure will translate into lower cost of loans for home buyers as well. The encouragement also comes to the development side of the business where the long-standing industry demand for asset classification has been addressed. This will augment liquidity situation for developers too. With these two significant initiatives by the RBI, the real estate sector will hope to make a faster come back,” said Shishir Baijal, Chairman and Managing Director, Knight Frank.
Equity markets trend positive following the status quo decision by the RBI's MPC. While a status quo was widely expected, the term repo action came in as a surprise and it expect to boost lending by banks by bringing down the cost of funds. BSE Sensex jumpedover 200 points after the RBI policy outcome while the Nifty was trading above 12,150 level.
Concerns of a weak economy remain
TheMPC statement said thatthe economy continues to be weak and theoutput gap remains negative. While some high-frequency indicators have turned around andpoint to a lift in the momentum of economic activity, it said that there is a need to await incoming data togauge their sustainability. Overall it said that financial flows to the commercial sector have improved in recentmonths.
RBI in its monetary policy statement said thattheincrease in customs duties on items of retail consumption in the budget may result in only amarginal one-time uptick in inflation. It added that the base effects would turn favourable during Q3FY21.
The Reserve Bank has said thatdomestic financial marketsremain volatile reflecting both global and domestic factors, which may have an influence on
the inflation outlook.
Arvind Chari, Head-Fixed Income, Quantum Advisor said that the MPCdecision to leave rates unchanged and retain the accommodative stance was discounted by the market. However, he added thatthe RBI governor has warned unequivocally, that the market should not discount the RBI. Chari said thatthe introduction of ‘Operation Twist’ was one such tool to try and influence the bond market and the yield curve despite not being able to cut the repo rate.
RBI said that theCheque Truncation System (CTS), which is currently operational at the major clearinghouses of the country, has stabilised well and it has made large efficiency gains. In view ofthis, RBI said that apan India CTS will be made operational by September 2020.
Arun Singh, Chief Economist, Dun and Bradstreet India said thatRBIfocus has to be on the monetary policy transmission in credit market as the full benefit of rate cut has not been passed to consumer yet. He added that the lower lending rate will provide some respite to investment rate and growth going forward. But Singh said that the surging inflation and slowing growth are raising serious concerns about the future growth prospects of the economy.
CPI inflation still a concern?
RBI has said that theadjustments totelecom charges are imparting cost-push pressures to CPI inflation excluding food and fuel.Going forward, the trajectory of inflation excluding food and fuel needs to be carefullymonitored as the pass-through of remaining revisions in mobile phone charges, the increase inprices of drugs and pharmaceuticals and the impact of new emission norms play out and feedinto inflation formation.
RBI governor Shaktikanta Das says that the Reserve Bank will allow regional rural banksto act as merchant acquiring banks, using Aadhaar Pay,BHIM
app and POS terminals. The detailed instructions in this regard will be issued today.
RBI governor Shaktikanta Das said that fresh gross marketborrowings are budgeted to increase by Rs 70,000 crore to Rs7.8 lakh crore in 2020-21 from
Rs7.1 lakh crore in 2019-20.
Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers said that despite their expectation of no rate cut in 2020, the categorical statement by MPC about the possibility of rate cut should boost sentiments. Hajra added that linking credit to medium industries to external benchmark, removal of CRR requirement on fresh retail housing and auto loans and credit to MSME are positive steps.
Amar Ambani, Senior President and Head of Research-Institutional Equities, YES Securities with inflation expected to remain elevated in the coming months, theysee a long pause on Repo rates. However, they expect the RBI to continue to act with other monetary tools like OMOs and Operation Twist. He added that RBI and government will likely take steps to improve transmission of rates in the economy.
More clarity on PMC Bank position
. When it comes to PMC Bank, RBI governor Shaktikanta Das says that the administrator andadvisory committee have a greater clarity onthe financial position. Das added that these bodies are now working on the next course of action.The fraud at PMC Bank came to light in September last year after the Reserve Bank of India discovered that the bank had allegedly created fictitious accounts to hide over Rs 4,355 crore of loans extended to almost-bankrupt HDIL.
The idea is to not interfere with the NDF market though it is opaque, says RBI ED Ravishankar.
The rate of transmission is improving and will improve further through our measures, says RBI governor Shaktikanta Das.
RBI deputy governor MK Jain says that the law to stregthen cooperative banks will help the Reserve Bankregulate and supervise cooperative banks more effectively.
RBI governor Shaktikanta Das says the way inflation played off last year was full of surprises, especially when it comes to food inflation. MPC will act in time, or perhaps ahead of time, says Das.
What RBI is concerned about is the borrowing numbers, says RBI governor Shaktikanta Das.
Deposit insurance increasemay not have a major impact on bank balance sheets, says RBI deputy governor BP Kanungo.
RBI deputy governor N S Vishwanathan said that banks should be able to lend rather than come back to the Reserve Bank through a reverse repo.
RBI governor Shaktikanta Das said that no plan of monetising the government deficit at present.
