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Expert Views: RBI Holds Rates Steady As Widely Expected

The MPC, as expected, kept the repo rate, its key lending rate, at 4.0%, while the reverse repo rate or the key borrowing rate stayed at 3.35%. The central bank has slashed the repo rate by 115 basis points (bps) since late March.

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The Reserve Bank of India (RBI) left key interest rates unchanged on Friday as widely expected, while retaining an accommodative monetary policy stance to support the coronavirus-hit economy.

The RBI sees India's real GDP contracting by 9.5% in the ongoing fiscal year, and economic growth only turning positive in the final January-March quarter, RBI Governor Shaktikanta Das said in a webcast after a meeting of the monetary policy committee (MPC).

The MPC, as expected, kept the repo rate, its key lending rate, at 4.0%, while the reverse repo rate or the key borrowing rate stayed at 3.35%. The central bank has slashed the repo rate by 115 basis points (bps) since late March.

COMMENTARY

KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU

"An inflation rate way beyond the upper range of the central bank's tolerance range clearly meant that the RBI was in no position to provide additional monetary policy stimulus through the rate cut channel to help the economy that is facing its worst contraction ever.

"Not surprisingly though, the RBI has maintained an accommodative stance implying that rate cut would be around the corner at the slightest hint of inflation coming under control.

"Not only has the headline CPI data got skewed because of the imputed values for March and April, but the trajectory of both the WPI and the GDP deflator moving in a direction virtually opposite to that of retail inflation underscores the data anomaly.

"We continue to expect an additional 50bp rate cut by the RBI though the timing remains a bit iffy."

SUMAN CHOWDHURY, CHIEF ANALYTICAL OFFICER, ACUITÉ RATINGS & RESEARCH LTD, MUMBAI

"In the context of increased concerns on higher bond yields and higher government borrowings, the RBI has given out a strong message that it will manage yields in an aggressive manner through larger OMOs which will also cover SDLs. This along with an expectation of a moderation in inflation over the next few months, is expected to keep 10-year government security yields at sub-6% levels and also facilitate higher borrowings by the states in the near term."

"Additionally, several regulatory measures such as tweaks on risk weights for home loans with higher equity contribution, increase of exposure limits to individual retail and small business loans and extension of co-origination models to cover all NBFCs and HFCs will help to incentivise higher lending to retail and SME sectors, thereby pushing the currently low credit growth."

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI

"The rate decision was mostly on expected lines as inflation is still very high. Inflation is expected to ease substantially in December. The Reserve Bank of India is expected to cut rates either in the next policy meet or the one after that. RBI is not done with rate cuts as yet. Up to another 50 basis points cut is likely during the current cyle."

RUPA REGE NITSURE, GROUP CHIEF ECONOMIST, L&T FINANCIAL HOLDINGS, MUMBAI

"Policy continues to stay dovish even as the overall mood has changed from COVID-19 containment to revival."

"By giving macroeconomic projections, the MPC has set the context of future policy moves. More transparency on open market operations (OMO), inclusion of state bonds in OMOs and extension of HTM limits will aid the absorption of large sized government market borrowings programme."

"The new MPC team appears to be on the same page."

AMIT SHAH, HEAD OF INDIA RESEARCH, BNP PARIBAS, MUMBAI

"Overall, we see the MPC action as in-line with positive commentary, especially the on tap TLTRO which would ensure enhanced liquidity."

"We think the RBI has been very prudent thus far in the way they have handled the economic contraction with first starting with providing moratorium and then selective restructuring of loans and easing monetary stance when it was needed."   

"I think the RBI had expected that India's battle with COVID-19 would be a long drawn one and hence they have been selective in using monetary policy as a tool so that they have some buffer that they can use in the event there a strong second or third wave in India."

Krish Raveshia, CEO, Azlo Realty

The status quo by the MPC on the repo rate front was on expected lines, and the unchanged 'Accommodative' policy stance indicates further easing. The linking of risk weight of home loans to LTV for all new housing loans is a step in the right direction, this will benefit the real estate sector.

The real estate sector needs further ease in policy rates, a cut in interest rates is a direct stimulus for homebuyers as it reduces the overall cost of buying a real estate unit, the same is evident in the September sales data which saw a spike post the Maharashtra government reduced the stamp duty rates.

The liquidity easing measures announced by the central bank via OMO, TLTRO will help businesses tide over the current phase, growth plans. The central bank has already slashed key rates by 250 bps since February last year which has resulted in lending rates falling to a nearly two-decade low, with lending rates as low as 6.9%, this coupled with the policy measures announced by state and central banks have helped boost business sentiment for the real estate sector.

Lincoln Bennet Rodrigues, Founder and Chairman, Bennet & Bernard Group 

Any further rate cut at this point of time would have definitely added to the positive sentiment, however, at the same time, it is imperative for banks to reduce lending rates as this is the need of the hour to further see a boost in the real estate sector. As the Covid 19 situation has altered our way of living, this festive season is opportune for investors to look at Goa seriously for a second-home investment and destination for luxury homes. As a premium real estate developer and catering to the elite segment, we remain optimistic for this season too. We have already witnessed an increase in the number of enquiries for our luxury villas and properties in Goa that offer safety, privacy and luxury, all in one space.

Harshad Chetanwala, MyWealtGrowth.com

Historically the interest rates in India have not remained low for long. However, with limited visibility of economic recovery and lot of sectors continue remaining fragile, RBI continues to support growth and kept key rates unchanged. RBI continues to tolerate low interest rates despite of high inflation, indicating that increase in interest rate will be slow and gradual pace until the pace of recovery improves.

Sameer Kaul, MD&CEO, TrustPlutus Wealth Managers (India)

The Monetary Policy Committee (MPC) has decided to leave the interest rates unchanged while maintaining an accommodative stance through the current financial year and into the next year. According to the RBI Governor, the global economy has seen a recovery in Q3 of the calendar year. In India, rising levels of energy consumption, increased fuel demand point to a pick-up in economic activity. Consumer confidence is also showing an uptick. Manufacturing PMI at 56.8 in Sept 2020 is the highest level seen since Jan 2012. The Governor also mentioned that we are likely to see a 3 speed recovery in India with varying pace of recovery across different sectors. According to the RBI, FY21 GDP in India may contract by 9.5% and may turn positive in Q4. Inflation is also likely to ease in Q3 and Q4FY21. Recovery in the rural economy is likely to be robust and aid the overall economic recovery. We are likely to see record food grain production this year.

While rates have been left unchanged the RBI has announced several measures to increase liquidity and credit flow in the economy. The weekly OMO limit has been increased to INR 20,000 Cr. The RBI is also going to conduct OMOs in State Development Loans (SDLs) for the first time to rationalize the SDL spreads over G-Sec yields. An on tap TLTRO with a tenure up to 3 years for an amount of INR 1 lac Cr. has been announced. The increased HTM cap of 22% for SLR holdings of banks has been extended to 31st March 2022. 

In order to ensure higher credit growth even to the individuals and small businesses (i.e. with turnover of up to Rs 50 crore), the limit for maximum aggregated retail exposure to one counterparty has been increased from INR 5 Cr. INR 7.5 Cr. The RBI has also decided to rationalize risk weights of new housing loans till 31st March 2022, a move that is likely to help reduce home loan rates.

The effect of the above measures are already visible with G-Sec yields falling by 8-15 bps across maturities and the INR appreciating to a one month high against the USD.

(With Inputs from Reuters)


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