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D-Street gave a thumbs down to RBI rate cut; here’s why

The market is also worried about the risk-averseness of banks due to fear of NPAs. The RBI needs to announce measures to ensure smooth transmission of liquidity.

May 22, 2020 / 02:15 PM IST
A man reacts as he looks at a screen displaying the Sensex results outside the Bombay Stock Exchange building, Mumbai, March 12. REUTERS

A man reacts as he looks at a screen displaying the Sensex results outside the Bombay Stock Exchange building, Mumbai, March 12. REUTERS

Equity benchmarks, Sensex and Nifty, dropped sharply after the Reserve Bank of India (RBI) announced 40 basis points cut in repo rate to 4 percent on May 22.

Sensex fell over 450 points while Nifty fell below 8,970, dragged by losses in shares of most banking and financial heavyweights.

Experts pointed out that while a cut in repo rate is good, the conversion of interest into term-loan will hit the cash flow of the banks that are already staring at a possibility of rising NPAs.

Besides, the market was expecting the restructuring of loans which was not addressed by the RBI.

"RBI acknowledged estimates of negative growth for the full year along with a recent spike in food inflation which might be sticky in the near-term. The moratorium extended with the conversion of interest into term loans will hammer cash flows of banks. And no restructuring signal as well has disappointed the market," said Sameer Kalra, Founder, Target Investing.


Jimeet Modi, Founder & CEO, SAMCO Securities & StockNote has a similar view.

"The disappointment came as there was no mention of the restructuring of loans or other supportive measures for banks. The negative outlook on growth without a definitive number added to the woes. Extension of the moratorium is good for the economy but in substance will negatively impact banks and NBFCs," Modi said.

The market is also worried about the risk-averse sentiment towards banks due to fear of NPAs. The RBI needs to announce measures to ensure smooth transmission of liquidity.

"By cutting the repo rate and reverse repo rate, RBI aims to inject more liquidity into the system. However, more importantly, what is needed is to remove the risk-averseness as there is substantial liquidity in the banking sector. The rising food inflation rate could be a challenge to the RBI as it is following the inflation targeting regime. Similarly, the extension of the moratorium would bring in some relief to the borrowers, but it can put pressure on the bank's balance sheet," said Deepthi Mathew- Economist- Geojit Financial Services.

Sonal Varma, Managing Director and Chief Economist (India and Asia ex-Japan) at Nomura concurs to it.

"While the room of further rate cut is still open, just cutting the rate beyond a certain point is not going to help. Incrementally, the focus should be on measures to improve transmission whether it is increasing the HTM (held to maturity) limit, OMO (open market operations) calendar and the SPV (special purpose vehicle) that has been announced for the NBFCs. There there are many other sectors that are under stress because of the slowdown. More sector-specific measures are required for effective transmission," Varma said talking to CNBC-TV18.

Keki Mistry, CEO, HDFC told CNBC-TV18 that the rate cut is good but it is also important to remove the aversion in the system.

Abhishek Goenka, Founder & CEO, IFA Global said the rate cut and reverse repo rate cuts are moves in the right direction but risk aversion by banks is still there.

"Some restructuring of the loans would have been a step in the right direction which the market was awaiting. Broadly it may be better for companies but banks may get hit in the short term," Goenka said.

Apart from cutting the key policy rates, the Monetary Policy Committee (MPC) maintained its accommodative stance.

Moreover, RBI Governor Shaktikanta Das on May 22 announced an extension of the moratorium on term loan EMIs by three months. The deadline for the earlier moratorium was May 31.

The loan moratorium will be extended till August 31 making it a six-month moratorium in all, Das said.

Das noted that term loan borrowers had raised concerns about the interest burden that will continue to remain as it is only a moratorium and not a waiver of EMIs. To address this concern, he said, the accumulated interest of the six months on loan moratorium can now be converted into a term loan.

On the other hand, weak global sentiment also kept the mood sombre. The tension between the US and China, rising COVID-19 cases and deteriorating macroeconomic health of the global and domestic economy continued weighing on sentiment.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Nishant Kumar
first published: May 22, 2020 11:43 am

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