RBI keeps policy rates unchanged, stance accommodative: What experts think

Today's policy announcement comes amid signs of recovery in the economy badly battered by the coronavirus pandemic

The Reserve Bank of India Monetary Policy Committee on Friday voted to keep key rates unchanged and maintained an accommodative stance, announced Governor Shaktikanta Das. With this repo rate stays at 4.0 per cent while reverse repo rate stays at 3.35 per cent

The development comes amid signs of recovery in the economy badly battered by the coronavirus pandemic.

"Mood of the nation has shifted to confidence & hope," said Shaktikanta Das adding that the GDP growth may turn positive by Q4FY21. There is an expectation of triple-speed recovery in economic activity, however, real GDP is expected to decline by 9.5 per cent. He said that focus must shift from containment to reviving the economy.

Here are some expert takes on the monetary policy

Policy to revive growth: Dinesh Kumar Khara, Chairman, State Bank of India

“Today’s policy statement by RBI is a perfect exposition of doing “whatever it takes” to revive growth. With growth projections at -9.5 percent and inflation set to be higher at least for now and the possibility of renewed infections in many countries, the monetary policy committee has righty chosen to keep the policy stance accommodative and relying more on discretion based policy responses rather than being strictly rule-based.

Accordingly, the decision to go down the OMO route for SDL borrowings, increasing the limit for risk weights for the retail portfolio up to Rs. 7.5 crores and linking housing loan risk weights to LTV ratio are policy innovations that will please the markets and nudge the term structure of rates lower. The policy has also targeted specific sectors that have high forward and backward linkages notably the retail and real estate sector. Additionally, the decision to operationalize the Co-origination model is right as it brings the best of banks and NBFC together. This will surely increase the reach of the financial sector at such a critical point. The other focus of development and regulatory policy namely discontinuation of automatic caution listing for exporters, 24x7 availability of RTGS, and perpetual validity of CoAs issued to payment operators are also welcome measures. Overall the policy is fixated to revive growth and has attempted to prepare a conducive ground for the same.”

As good as it gets: Abheek Barua, Chief Economist, HDFC Bank

Today’s monetary policy was as aggressively accommodative as possible without cutting the policy rate. The decision to remain accommodative for an extended period and to look through “transient humps” in inflation reveals an appreciation for the basic principles of economics –that a GDP contraction of 9.5 per cent is simply not compatible with demand side inflation pressures. If inflation has persisted over the RBI’s target limit, it has been driven by persistent supply side problems. Persistence itself cannot transform a supply driven problem to a demand side concern amenable to monetary policy driven containment. 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.

The highlight of the policy was the RBI’s signal that it would “do whatever it takes” (a phrase immortalized by former European Central Bank Governor Mario Draghi) to align risk-free government bond yields with the fundamentals of the economy. This involved key changes such as an increase in the size of Open Market Operations and innovations like OMOs in State Government Bonds. Were these measures to succeed, as we expect them to, the upward pressure on yields that have built up on the back of heavy anticipated supply of central and state government bonds, is likely to moderate.

Has the RBI gone overboard in its effort to support growth? We think not. These are unprecedent 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. Conservatives will fret over both inflation and financial stability risks given the combination of a liquidity glut and an effective dilution of prudential norms for things like home loans. We believe it’s a risk worth taking.  

In line with our expectation: Anagha Deodhar, Economist, ICICI Securities

The unanimous vote to keep repo rate unchanged is in line with our expectation, given high inflation and expected inflation trajectory. Despite no rate cut, the policy is extremely dovish due to the liquidity and regulatory measures announced today. More specifically, we believe ‘on tap TLTRO’, OMOs in state development loans, extension of HTM limits till Mar ‘22, and rationalisation of risk weights on housing loans are very important measures and are likely to ease financial conditions further and provide support to key sectors of the economy.

The committee also gave forecasts on growth and inflation.

After the sharp 24 per cent contraction in Q1FY21, the MPC expects growth to come in at -9.8 per cent in Q2, -5.6 per cent in Q3 and 0.5 per cent in Q4. We agree with the committee’s assessment that manufacturing sector is likely to drive the recovery while relatively more contact-intensive services sector could take a while to recovery. On the inflation front, the governor noted that the recent pick-up in inflation is due to supply disruption and higher markups during lockdown. Going forward, as supply chains are restored inflation could ease to 4.5-5.4 per cent in H2FY21.

A glimmer of positivity: Anuj Puri, Chairman, ANAROCK Property Consultants
 

Amidst its efforts to curb inflation - currently hovering above 6 per cent - RBI, as expected, has kept both the repo rate and reverse repo rates unchanged at 4 per cent and 3.35 per cent respectively while maintaining an accommodative stance.

With real estate demand gradually seeing some green shoots of revival, especially in the wake of reduced stamp duty charges (in Maharashtra) and developers discounts and freebies, reduced repo rates would have given an added boost just before the upcoming festive season. But with consumer inflation still trending at the upper end of the apex bank’s band, and the policy repo rate also being substantially reduced by 140 basis points in 2020, today’s move was expected.

On a positive note,  RBI’s move to rationalise risk weightage on home loans and linking housing loans risks only to loan-to-value is a welcome move. This announcement thus will definitely encourage banks to lend more to individual homebuyers without feeling the stress on their balance sheets. In the current.

Overall positive and growth oriented: Padmaja Chunduru, MD&CEO, Indian Bank

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, said  Padmaja Chunduru, MD&CEO, Indian Bank.

She added, the RBI's assurance on maintaining comfortable liquidity conditions will assure the markets, at the same time enable the Government to go ahead with its borrowing programme smoothly.

Chundru also welcomed announcements on rationalisation of  risk weightage in case of new housing loans on loan to value basis; and announcement of on tap TLTRO for Rs 1 trillion, at 4 per cent till March 2021.

With some sectors already showing strong signs of recovery, the RBI's steps are in the right direction and will give further momentum to GDP growth, said Chundru.

A lot of positive vibe around this policy: Lakshminarayanan Duraiswamy, MD, Sundaram Home Finance
 

Lakshminarayanan Duraiswamy, MD, Sundaram Home Finance added RBI policy is quite a welcome move –despite no rate cuts, there is a lot of positive vibe around this policy.

In line with broad market expectations, rates remain unchanged. On tap TLTROs is a welcome development and will result in incremental liquidity. The move to conduct OMOs in state government securities is a big positive.

"Hike in threshold for retail exposure is a sign that banks will consider the MSMEs with exposure limits favourably. Linking risk weights to LTVs is a welcome move and risk based pricing might evolve gradually.  Extending the co-origination model to HFCs is a step in the right direction, but we will have to see the operational guidelines for details," said  Duraiswamy.