RBI policy overall positive, growth-oriented, say experts

New Delhi, October 9

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Financial sector participants on Friday have said the RBI’s decision to keep the key repo rate unchanged is an accommodative approach to manage inflation while keeping growth as target amid the current economic conditions.

The Monetary Policy Committee (MPC) evaluated domestic and global macroeconomic and financial conditions and voted unanimously to leave the policy repo rate unchanged at 4 per cent, RBI Governor Shaktikanta Das has said in his policy statement for the bi-monthly monetary policy review.

“It also decided to continue with the accommodative stance of monetary policy as long as necessary – at least during the current financial year and into the next year – to revive growth on a durable basis and mitigate the impact of COVID-19, while ensuring that inflation remains within the target going forward,” Das said.

Friday’s monetary policy was as aggressively accommodative as possible without cutting the policy rate, said Abheek Barua, chief economist, HDFC Bank.

“Given the stance, there is a significant probability of a rate cut in February, if not in December itself as inflation, as we expect, moderates. Has the RBI gone overboard in its effort to support growth? We think not. These are unprecedented times and the Indian economy’s revival efforts are hobbled by the lack of adequate fiscal support. If monetary policy does have to do the heavy lifting, it cannot do it within the confines of a conventional take-no-risks framework,” Barua said.

Siddhartha Sanyal, chief economist and head of research, Bandhan Bank, said the RBI had strongly conveyed their commitment to support growth recovery, even when the MPC’s hands were virtually tied in the policy as regards the policy rates.

“Steps such as larger quantum of OMOs and OMOs in state government securities should offer cheer for the bond market while on-tap TLTRO and rationalisation of risk weightages of housing loans are meaningful steps in the right direction. We continue to expect discussion on rate cuts to be back on the table later during the year as inflation prints start softening,” he said.

The Reserve Bank in its policy statement said it was ready to conduct market operations to assuage pressures arising out of it and dispel any illiquidity in financial markets.

“The monetary policy announcement is overall positive and growth-oriented. The RBI Governor has rightly mentioned that focus must be on reviving the economy. Accordingly, the accommodative stance was as expected. The RBI’s assurance on maintaining comfortable liquidity conditions will assure the markets, and at the same time, enable the government to go ahead with its borrowing programme smoothly,” said Padmaja Chunduru, MD and CEO, Indian Bank.

The policy measures recognise the growth risk the economy faces and the imperativeness of providing liquidity for growth, said RK Gurumurthy, head of treasury, Lakshmi Vilas Bank.

“In what is seen as a comprehensive approach to addressing both inflation and growth, the measures are a continuation of the accommodative stance we have seen over the last nine months. Once inflation, which remains a supply-side disruption currently, softens, the RBI should be willing to cut rates and we expect at least a 35-basis cut this FY. The decision to hold rates steady would also help to protect net interest margin (NIM) of banks as a majority of the loan book is linked to the repo or other floating benchmarks,” Gurumurthy said.

Aditi Nayar, Principal Economist, ICRA, said the policy statement struck a confident note on the outlook for economic activity, especially the projection of a mild growth in Q4 FY2021, which appeared to be coloured by the spate of positive data for September 2020, the sustainability of which was as-yet uncertain.

The RBI has expected the economic growth to return to positive in the last quarter ending in March next year.

For the full year, GDP was expected to decline by 9.5 per cent, with risk tilted to the downside mainly because the external demand is still anaemic, RBI said.

“We remain circumspect about generalising these early greenshoots, as they have benefitted from base effects and one-off shifts in some sectors. In our assessment, inflation may not relent appreciably below 5 per cent until December 2020, dimming hopes of a rate cut prior to the final policy meeting scheduled for this fiscal year,” Nayar said.

Anshuman Magazine, chairman and CEO, CBRE India, South East Asia, Middle East and Africa, said the RBI had maintained an accommodative stance which was positive for the economy.

“The RBI’s decisions to relax loan to value (LTV) guidelines and rationalise risk weights for home loans will further encourage homebuyers and their review of the co-origination model between banks and NBFCs and extension of the scheme to all NBFCs (and banks) will improve the flow of credit in the economy,” he said.

“We are hopeful that these measures will strengthen recovery in residential demand and support construction activity as well,” Magazine said.

The policy clearly outlines that the focus would continue on reigniting the economy’s growth engine even as inflationary pressures were seen abating in Q3 and Q4, said Nitin Aggarwal, Group CFO, Religare Enterprises Limited.

“While FY21 growth is pegged at -9.5 per cent, it’s heartening to note that growth is seen turning positive from Q4. It is likely that the central bank may now go for one more round of rate cut in December to support growth momentum,” he added.  PTI