With RBI maintaining accommodative stance, experts see another 50 bps repo rate cut in FY21

The Monetary Policy Committee's unanimous decision of keeping repo rate (4 percent) and reverse repo rate (3.35 percent) unchanged was on expected lines given the higher inflation and large rate cuts in 2020 so far, but continuing the accommodative policy stance suggests that there could be another 50 bps repo rate cute in the FY21, experts feel.

"Given the uncertainty surrounding the inflation outlook and extremely weak state of the economy in the midst of an unprecedented shock from the ongoing pandemic, the MPC decided to keep the policy rate on hold, while remaining watchful for a durable reduction in inflation to use available space to support the revival of the economy," said the RBI in its statement on August 6.

The MPC continues with the accommodative stance of monetary policy as long as necessary to revive growth, mitigate the impact of COVID-19, it added.

"As expected, it is status quo on rate, and the emphasis is more on continuing with the accommodative stance, liquidity enhancement measures and restructuring of the stressed loan portfolios. The outlook for growth and inflation continues to be uncertain, and contraction in GDP growth is expected and inflationary pressures are expected to remain elevated in Q2 and it may moderate in Q3," Joseph Thomas, Head of Research - Emkay Wealth Management told Moneycontrol.

The Reserve Bank of India had already cut the repo rate, the rate at which the central bank lends money to commercial banks, by 115 bps since the beginning of lockdown in March.

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Headline CPI inflation, which was at 5.8 percent in March 2020, increased to 6.1 percent in the provisional estimates for June 2020. Inflation pressures were evident across all sub-groups, said the RBI.

RBI feels the headline inflation may remain elevated in Q2 FY21 but may moderate in the second half of FY21 aided by large favourable base effects. "Protein-based food items could also emerge as a pressure point, given the tight demand-supply balance in the case of pulses. The inflation outlook of non-food categories is, however, fraught with uncertainty. Higher domestic taxes on petroleum products have resulted in elevated domestic pump prices and will impart broad-based cost-push pressures going forward. Volatility in financial markets and rising asset prices also pose upside risks to the outlook," it explained.

For the year 2020-21, real GDP growth is expected to be negative, the central bank believes.

Given the accommodative stance, the RBI intimated that there could be further rate cuts once the inflation cools off and that is likely, experts feel.

"RBI has clearly stated that there is further room for a rate cut, but the central bank will wait and watch for a 'durable reduction', in inflation for further rate action. This amounts to saying that only if there is sustained fall in inflation especially food prices RBI may consider further rate cuts. This does not rule out further rate cuts but makes it linked to inflation performance," Joseph Thomas said.

Experts feel another 50 bps repo rate cut could be possible in the rest of FY21 to boost the economy and the RBI could be waiting for the full economy to re-open so that it can act on the rate cut.

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"The Governor clearly indicated that space for further rate cuts remain as inflation is likely to soften in H2 FY21. We expect the RBI to cut repo rate by further 50 bps in FY21 but it may come once the lock-down restrictions are fully removed and inflation actually comes down," Sujan Hajra, Chief Economist and Executive Director at Anand Rathi Shares & Stock Brokers told Moneycontrol.

Amar Ambani, Senior President and Head of Research – Institutional Equities at Yes Securities also sees scope for another 50 basis points drop in rates from the current level.

"More importantly, the RBI Governor addressed liquidity concerns in COVID crisis for housing, MSMEs, the flow of credit in corporate bond markets and facilitating improved platform and system for banks. The policy will be seen as a positive for banking sector since no extension of moratorium, one-time restructuring allowed with strict conditions, a veteran banker in Mr KV Kamath to lead the expert committee and allowing secured loans through gold as collateral with higher LTVs," Ambani said.

With a view to mitigating the impact of COVID-19 on households, the RBI has decided to increase the permissible loan to value ratio (LTV) for gold loans to 90 percent.

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The Reserve Bank is constituting an Expert Committee, headed by KV Kamath, to make recommendations to the RBI on the required financial parameters, along with the sector-specific benchmark ranges for such parameters, to be factored into resolution plans, said the central bank in its statement.

To support the MSME sector which hit by the COVID-19 pandemic, the RBI has decided that stressed MSME borrowers will be made eligible for restructuring their debt under the existing framework, provided their accounts with the concerned lender were classified as standard as on March 1, 2020. "This restructuring will have to be implemented by March 31, 2021."

The RBI also provided additional special liquidity facility of Rs 10,000 crore at the policy repo rate consisting of Rs 5,000 crore to the National Housing Bank (NHB) to shield the housing sector from liquidity disruptions and augment the flow of finance to the sector through housing finance companies (HFCs); Rs 5,000 crore to the National Bank for Agriculture and Rural Development (NABARD) to ameliorate the stress faced by smaller non-bank finance companies (NBFCs) and micro-finance institutions in accessing to liquidity.