RBI Monetary Policy Highlights | Central bank says growth slowly coming back; 6 key takeaways

As expected, the MPC decided to maintain a status quo on benchmark rates. The RBI has reiterated the non-disruptive conduct of the government borrowing programme. To this effect, the OMO amounts have also been increased to Rs 20,000 crore. RBI’s willingness to look through the current phase of high CPI and future expectation of CPI coming closer to the RBI’s target should work as a strong anchor for bond yields. This indeed is a pre-Diwali Dhamaka for bond markets: Lakshmi Iyer, Chief Investment Officer (Debt) & Head - Products, Kotak Mahindra Asset Management Company

The central bank has tried to reduce borrowing costs for the Centre, the states and companies... Read More

The outcome of MPC meet was largely in line with expectations. Rates have been kept unchanged and stance remains accommodative. Announcement of OMO (including OMO for SDL) and on tap LTRO will aid pushing more liquidity into the system and keeping interest rates in check. Announcement to allow banks to increase exposure to retail and small borrowers up to Rs 7.5 crore and rationalising risk weights for all new housing loans till March 31, 2022 are welcome from the borrower’s perspective but Banks need to beef up their credit appraisal processes.
MPC expects inflation to ease gradually towards its target over Q3 and Q4 as supply disruptions and associated margins/mark-ups driving up inflation would abate. RBI finally gave GDP forecast and expects a contraction at 9.5% for FY21 with downside risks. As the economy continues to be in a fragile state, recovery in growth assumes primacy. The RBI’s intent to support the economy even in the wake of rising inflation is comforting: Dhiraj Relli, MD & CEO, HDFC Securities

Rupee ends higher: Indian rupee ended marginally higher at 73.16 per dollar on October 9, amid buying seen in the domestic equity market after RBI kept the Repo Rate unchanged at 4% and continued with the accommodative stance. It opened at 73.18 per dollar against previous close of 73.24 and traded between 73.02-73.26.

Decision to rejig home loan rules will provide boost to the real estate sector. RBI Governor Shaktikanta Das' announcement of keeping the repo rates unchanged while forecasting a 9.5 percent contraction in FY21 was on expected lines. It affirms our beliefs that the worst is over for the Indian economy. The RBI governor also confirmed that the contraction in economic growth witnessed in the April-June quarter with 23.9 percent is behind us. He also accepts that growth is likely to pick up in the second half of the fiscal and enter into the positive zone in the January-March quarter. The RBI’s decision to keep key rates unchanged was also much anticipated. Further reduction in key interest rates was not a possibility at this juncture. The RBI’s decision to extend the scheme for co-lending to all NBFCs, HFC in respect of all eligible priority sector loans will allow greater operational flexibility to the lending institutions and is much welcomed.
RBI’s decision to rationalise the risk weights on home loans and link them to Loan to value ratios only will give a boost to the real estate sector as well. Particularly this step would benefit borrowers of higher value loans. It would ensure that more credit is available to borrowers. This move is a much appreciated step recognising the role of the real estate sector in generating employment and economic activity. The industry welcomes the RBI's announcement to undertake further measures as necessary to assure market participants of access to liquidity and easy finance conditions. The RBI has through its proactive measures taken honest efforts to provide access to easier credit to smaller businesses. However, we believe further steps would be needed to revive the economy: ASSOCHAM president, Dr. Niranjan Hiranandani

Festivities begin in bond street earlier than one expected. RBI’s MPC’s new combination of external members announced an operationally more dovish policy without cutting rates and should be a watershed event for the broader economy. In what is seen as a comprehensive approach to addressing both inflation and growth, the measures are a continuation of the accommodative stance we have seen over last 9 months.
Repo and Reverse Repo rates remain unchanged. Special dispensation for HTM holding extended until March 2022 with a provision to buy Government securities until March 2021 and hold the same in HTM to an extent of 22% of NDTL. OMO amount increased to 20k per auction, TLTROs made an on-tap facility and end-use is sector specific with thrust towards NBFCs. Current spurt in retail inflation considered transient and RBI sticks to earlier estimates and is optimistic of containing within its forecast range. Most creative and unconventional is the announcement of OMO Purchases of State Development Loans. This will ensure the states’ borrowing program is non-disruptive and the cost remains anchored to broader market realities. Other key measures include linking risk weight for home loans to LTVs and making RTGS a 24x7 payment system on the same lines of NEFT.
The policy measures recognize the growth risk the economy faces and the imperativeness of providing liquidity for growth. Recent measures and the cut-offs in auctions that RBI was not comfortable with higher yields and today’s policy reinforces that thought. Once inflation, which remains a supply-side disruption currently, softens, RBI should be willing to cut rates and we expect atleast a 35 basis cut this FY. The decision to hold rates steady would also help to protect NIMs of Banks as a majority of the loan book is linked to the Repo or other floating benchmarks.
Markets have rightly responded. Currency, Fixed Income Yields and Equities have all taken the policy measures positively and barring bouts of profit taking, the good times appear to be an enduring one: RK Gurumurthy, Head – Treasury, Lakshmi Vilas Bank

Indian market rallied on October 9 after the Monetary Policy Committee (MPC) kept rates on hold on expected lines. Read here, a list of 14 rate-sensitive stocks that are likely to benefit the most from a rate cut.

At this juncture, priority has been given to anchoring rate and inflationary expectations, with an eye likely on the available policy room vis-à-vis price momentum... Read More

The RBI projected CPI inflation at 6.8 percent for Q2FY21, at 5.4-4.5 percent for second half of FY21 and 4.3 percent for Q1FY22, with risks broadly balanced.... Read More

Bank stocks, including ICICI Bank, Axis Bank, HDFC Bank and State Bank of India, witnessed decent gains after the RBI MPC maintained the status quo on key lending rates and maintained an accommodative policy stance.The Nifty Bank index rose almost 3 percent in intraday trade with most components trading with gains.
Bank stocks rose after the RBI indicated it will keep the system adequately liquidated. RBI said the focus of liquidity measures by the RBI will now include the revival of activity in specific sectors that have both backward and forward linkages and multiplier effects on growth. Read more here

RBI is clearly looking through inflation giving more priority to growth, bearing in mind that inflation is led by supply chain disruptions. India’s GDP contracted by 23.9 percent in the April-June quarter of 2020. But the future quarters are expected to be better with the RBI forecasting GDP to contract by 9.5% in FY 2021. Importantly, the Central Bank believes that GDP growth may turn positive by the fourth quarter. The headline inflation rate was recorded at 6.7 percent during April-July 2020 due to strong supply-chain disruptions. This is above the outer limit of RBI’s medium-term inflation target 6%. The Central bank continues to maintain its accommodative stance to allow elbow room for further policy interventions if required. Thus, the repo rates remained unchanged at 4%. So far, the RBI has slashed rates by 115 basis points this year to support the economy and real estate sector in particular, amid the COVID-19 pandemic.
RBI has rationalized risk weights for all new home loans which will be availed until 31st March 2022. Unlike the existing system where it was linked to both size of the home loan and loan to value (LTV), it will now be linked to only LTV of home loans. This is timely and a step in the right direction and is expected to provide a fillip to housing loans, thus having a positive impact on the residential sector: Ramesh Nair, CEO & Country Head, JLL

The RBI policy is on expected lines, as it keeps the base rate unchanged and the policy stance accommodative. The probability of RBI cutting rates in the near future remains quite low in view of the higher inflationary pressures. RBI views the current spike in prices a "transient hump", as price level may moderate in Q4. But, with a huge government borrowing program ahead, the RBI will continue with the liquidity support. It is actually the liquidity that has been helping both the debt and the equity markets. There is always a constituency of market participants who want rate cuts. They will be certainly 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. The positioning of portfolios should continue on the same lines with an accent on the short and mid sector. The expected GDP contraction for FY 21 is placed at 9.50%, which is also quite close to most of the market estimates, with the Q4 number must likely turning positive number: Dr. Joseph Thomas, Head of Research - Emkay Wealth Management

The government has appointed three eminent economists Ashima Goyal, Jayanth R Varma and Shashanka Bhide as members of the Monetary Policy Committee.... Read More