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Saturday 25 January 2020

RBI policy rates intact; SBI disapproves status quo

The 6-member MPC headed by the RBI governor unanimously decided to maintain the repo rate at 5.15% and the reverse repo rate at 4.90%

The Reserve Bank of India (RBI) did not make any change in policy rates in the monetary policy review, not living up to the expectations of the capital market. Following the RBI move on Thursday, the stock markets fluctuated and then plunged.

The 30-share Sensex of the Bombay Stock Exchange closed at 40,779.59 points, down 70.70 points or 0.17%. The Sensex moved up and down during trading as the central bank maintained the status quo on the interest rates front.

The National Stock Exchange’s Nifty also closed at 12,018.40 points, a loss of 24.80 points or 0.21%. Among the Sensex companies, Bharti Airtel, Tata Steel, IndusInd Bank, Hero MotoCorp and Tata Motors lost losses.

On the other hand, TCS, ITC, L&T, Infosys and Tech Mahindra were the major gainers. Metal group index declined the most. The basic logistics and energy index also declined. The RBI did not make any change in the repo rate in the monetary review because of concerns that the main inflation would exceed the medium-term target.

The six-member Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, unanimously decided to maintain the repo rate at 5.15% and the reverse repo rate at 4.90%. Earlier, the central bank of the country had has cut interest rates five times in a row.

Bankers and economists were hoping that the central bank would cut interest rates for the sixth time to support the slowdown in the economy. The economic growth rate has come down to 4.5% in the second quarter of the current financial year, its six-year low. In the same quarter of the previous financial year, the growth rate of gross domestic product (GDP) was 7%.

Assessing the RBI decision, Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, said, “The RBI decision to maintain status quo has taken the market by complete surprise. However, this should not be construed as an unanticipated policy surprise and the markets must read through the fine print carefully. The markets do not like unexpected news and, to that extent, yields have jumped. However, markets must interpret it as a temporary pause…”

In a similar vein, SBI said, the current pause with an accommodative stance could just be an attempt to allow the impact of surplus liquidity and transmission to permeate through the system. “But in the same vein, given that inflation will stay elevated in the next couple of months at close to at least 5.3%-5.4%, a February cut is ruled out (December inflation numbers will be available only) at least logically,” wrote Ghosh.

“By the same logic,” the economist said, “an April cut looks difficult. Thus, it might be a longer pause. Experience in Australia and elsewhere has shown that inflation is difficult to fine-tune within a narrow band. Thus, RBI can take a cue from the Australian central bank, which aims at maintaining the inflation target over the business cycle.”

Interestingly, credit market transmission is happening and will pick up a much faster pace as rates are reset from next quarter, SBI believes. “The one-year median MCLR has declined by 49 bps while the WALR on fresh rupee loans sanctioned by banks declined by 44 bps,” its assessment reads.

“… the government, in conjunction with the RBI, should consider a similar step like TARP to address the problems in NBFC sector,” SBI said.

The largest public sector bank in the country suggested that the government sponsor a fund or liquidity facility to buy out stressed real estate projects at fair valuation and ensure their completion. “The fund will have the potential to make significant profits and even at present, ready properties are housed at locations where there is enough demand,” the bank said.

The SBI is apprehensive that if too much time elapses, NBFCs will further reduce their assets, thus continuing a credit crunch. “What is needed is a credible backstop for the NBFC sector which can be used quickly to absorb potential losses, if they materialise. We can’t wait any further!” the public sector bank assessed.

However, SBI and IBA chairman Rajnish Kumar is happy with what the bank’s CEA has called “status quo”. A press release by the bank with his quote reads: “The RBI decision for a status quo, though an unanticipated policy surprise, is the most appropriate as monetary policy works with a lag. The lowering of the GDP growth for FY20 and FY21 reflects continued growth conundrums and a slow recovery. On the development and regulatory front, the steps announced for the primary (urban) cooperative banks will facilitate increased public confidence in these institutions.”

“Today’s policy announcements have also given a further push for the development of the secondary market for corporate loans by the creation of SRB thereby matching the global best practices in this regard. The decision to allow OTC currency derivative transactions up to $ 10 million without evidence of underlying exposure will provide a fresh breath of life to this market giving it much-required depth going forward,” Kumar said.

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