Monetary Policy: Industry Outlook

The third bi-monthly policy announced a rate cut of 35 basis points in its benchmark repo rate. NewsBarons connects with leading industry leaders to present their views on the announced rate cut.

The main focus is now on improving rate transmission of the Bank lending rates: Dhiraj Relli, MD & CEO, HDFC Securities

HDFC securities-Dhiraj Relli - CEO & MDThe RBI monetary policy committee’s decision of an unconventional 35 bps rate cut speaks about its intent of cutting rates more than the usual 25bps but less than the 50 bps which it termed as excessive. This however induces some uncertainty in market expectations on the quantum of rate changes expected henceforth. The overall tone of the monetary policy was dovish with slowing growth – both on the global and domestic front – being a major concern. ‘Cyclical slowdown in growth’ as RBI governor mentioned – has been the primary driving factor for rate cuts as seen in the past few MPC decision.

The main focus is now on improving rate transmission of the Bank lending rates, which by far has not shown commensurate extent of easing.

The RBI policy stance clearly is pro-growth. The fresh measures taken to increase flows to NBFCs is credit positive and will enhance lending. The policy stance has been retained as accommodative. With benign inflation outlook and no room for more fiscal pressure to revive growth; one can expect more rate cuts in future.

To enhance credit flow to the NBFC sector, two more measures have been announced. First, it has been decided to raise a bank’s exposure to a single NBFC to 20 per cent of Tier-I capital of the bank and second, it has been decided to allow bank lending to registered NBFCs (other than MFIs) for on-lending to (i) agriculture (investment credit) up to Rs 10 lakhs; (ii) Micro and Small Enterprises up to Rs 20 lakhs; and (iii) housing up to Rs 20 lakhs per borrower (up from Rs 10 lakhs at present), to be classified as priority sector lending.

The impact of monetary policy easing since February 2019 is expected to support economic activity, going forward. The RBI has done its job; now it is upto the Govt to change gears to hasten the growth engine which has been slowing.

RBI`s mandate to open up lending to NBFC sector will boost the consumer spending: George Alexander Muthoot, MD – Muthoot Finance Limited

www.newsbarons.comThe 35 bps cut by the RBI is in alignment with the industry expectations and current economic conditions. Also, RBI`s mandate to open up lending to NBFC sector will boost the consumer spending like auto sales, real estate etc.

We expect the rate cuts to encourage the banks for a faster transmission thereby providing much needed relief to the cost of funds. The policy clearly focuses on managing inflation and reviving the economy. The overall investment demand and the credit environment of the economy will pick up.

The 35 basis point cut is an interesting policy innovation: Abheek Barua, Chief Economist, HDFC Bank

www.newsbarons.comThe 35 basis point cut is an interesting policy innovation and does away with the convention of changing the policy rate in multiples of 25 basis points. Although the governor had alluded to this at an international policy forum in February, few in the market had expected him to walk the proverbial talk so soon. The RBI has painted a reasonably gloomy picture for the economy and the 35 bps cut seems to suggest that it concedes the fact that the extent of the slowdown is sharper than it had projected earlier although it does not see the need to push the panic button (that a 50 bps might have been interpreted as). There are some disappointments though. There are few specific actions to enhance transmission of policy rates to the either the credit or bond markets except for the governor’s assurance that this will happen soon. There was not much any clarity either on whether the current liquidity situation (characterized by large surplus liquidity) is likely to persist under the new liquidity framework that is due to be announced soon. However if we were to read the governor’s lips closely in the press conference the risk of significant liquidity compression seems remote. The revision of the GDP growth from 7 to 6.9 per cent is paltry and somewhat dissonant with the characterization of the economic situation. We expect the RBI to cut rates by more given that low inflation readings and a slowdown in growth gives room to keep monetary policy accommodative.

The Monetary Policy Committee (MPC) surprised positively with a 35 bps cut: B Prasanna, Head – Global Markets group, ICICI Bank

B Prasanna, Head- Global Markets Group, ICICI BankThe Monetary Policy Committee (MPC) surprised positively with a 35 bps cut given on the back of a continued growth slowdown. The MPC remains sanguine on inflation with projections up to Q1 FY2021 remaining well under 4% while it downgraded GDP forecasts to 6.9% with downside bias. The Governor also spoke about the importance of monetary policy transmission and the central bank’s support to keep adequate liquidity in the system. Steps to enhance the credit flows to NBFCs and classification of certain sectors to the priority sector lending through NBFC on-lending are also welcome. Going forward, given the rhetoric that supporting private investment remains “highest priority”, we do not rule out further accommodation if growth impulses continue to be slow.

Permitting Banks to lend through NBFC for priority sector lending would make transmission faster and efficient: Umesh Revankar, MD and CEO – Shriram Transport Finance

www.newsbarons.comWe welcome the RBI`s decision of 35bps cut. This rate cut is in line with our expectations in current economic conditions. With a total of 110 bps cut in 2019, we expect the banks to be in a comfortable position to do the transmission of the same.

Permitting Banks to lend through NBFC for priority sector lending would make this transmission faster and more efficient. This also would significantly improve the MSME functioning in the current environment and ultimately contribute to faster growth of economy. As the monsoon predication is very positive, the overall demand will pick up during Ganesh Chaturthi and would keep the momentum positive through the year.

It is imperative to see the impact percolate to the real sector: Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company

The RBI MPC today departed from the conventional rate action of 25 bps and its multiples and announced a 35 bps cut in repos rate. The accommodation in stance continues. The sluggish global economy, the fact that world over central bankers are easing rates, and of course our economy also faces growth headwinds were among the key reasons that can be attributed to the rate cut. There seems to be a fervour to maintain comfortable liquidity in the banking system, which should be an additional support factor for bond yields, apart from cut in benchmark rates.

Going forward, the quantum and timing of rate actions (read cut as we are in accommodative stance) would be largely data dependent. With today’s rate action, we have seen a cumulative rate reduction of 110 bps, and it is imperative to see this impact percolate to the real sector.

We expect GDP growth to miss RBI projection and grow around 6.5%: Murthy Nagarajan, Head-Fixed Income, Tata Mutual Fund

www.newsbarons.comRBI took the unusual step of reducing the repo rate by 35 basis points. The repo rate now is 5.4 %. They have also reduced the GDP growth forecast to 6.9 % from 7 % levels. The reason for cutting repo rates is increase the output in the economy, as per RBI, the economy is running significant slack due to consumption and investment slowdown.

The global economy is slowing down due to trade wars between US and china, Brexit uncertainty, high debt levels of households and geo political concerns in the middle east. 14 Trillion USD of developed markets bonds are trading in negative territory.

As per RBI , the one year forward CPI inflation is forecast at 3.6 %. Given the current repo rates of 5.4 %, the real rates is around 1.8 % (5.4- 3.6) levels which is on the higher side. As per our view, GDP growth will face significant headwinds due to global uncertainty and high debt of corporates. We feel deeper cuts in policy rates are required to tackle GDP slowdown. The number of defaults of companies has led to trust deficit amongst lenders. We are witnessing mutual funds and banks shying away from lending to NBFC, HFC and other corporates. Given that many NBFC, HFC cater to the segment which is not serviced by the banks, the revival of these companies is crucial for the economy to grow at a robust pace. RBI and the government needs to support transmission of lower rates to these companies. We expect GDP growth to miss RBI projection and grow around 6.5 % . This will necessitate cut of 40 to 50 basis points more in Repo rates along with providing sufficient liquidity in the banking system.

Accelerating transmission of the rate cut to the end consumer will boost investment sentiments: Narinder Wadhwa, President Commodity Participants Association of India (CPAI)

The Reserve Bank of India’s decision of a cumulative rate cut for the fourth time in a row was to ease the situation of liquidity tightening in the system. The regulator has retained its accommodative stance, which indicates its willingness to remain flexible till the economic conditions improve. The uptick in gold prices with the rate cut announcement indicates the investors confidence in this traditional asset during uncertainties. The easing of liquidity situation and accelerating transmission of the rate cut to the end consumer will boost investment sentiments in commodities ahead of the festival season.