RBI Monetary Policy Highlights: MPC warns of elevated headline inflation in Q2FY21

A Positive step by Reserve Bank of India to pay heed to India Inc’s long pending demand of Onetime restructuring of loans without classifying them as NPAs, by setting up an expert committee steered by KV Kamath. Opening up the window for restructuring of loans to companies, individuals and MSME under mandated safeguards grants breather to the liquidity strapped industry.

A flexible repayment scheme under the new resolution framework shall bring in the much-needed relief to resume operations smoothly. He additionally acknowledged the fact accorded by the RBI governor of maximum transmission of rate cut benefits percolating down the banking stream, which shall be reflected in easing the credit supply to meet working capital needs of the Industry across the board.

Additionally, liquidity of Rs 5,000crores announced to be infused in NHB will definitely aid the reeling sector to tide over the liquidity crisis.

The enhanced finance flow should see developers in need of last mile funding being able to complete their stalled projects. This indicates that the fiscal measures by RBI have started showing the positive outcomes on the economy, he concluded.

With the start of Covid-19, RBI’s stance/priority had clearly changed from containment of inflation to addressing the stress in the economy and tackling growth-related challenges. In today’s policy, RBI MPC reiterated its commitment to address growth challenges of the economy (especially second-wave effects of Covid-19), by maintaining an accommodative stance for as long as necessary. This implies that RBI could be looking at an extended period of low rates.

The announcement to harmonize the capital charge (for market risk) treatment of investment by banks in Debt Mutual Funds / ETFs and direct debt instruments, augurs well for the bond market, as there could be higher participation by banks in the bond markets over a period of time.

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The Reserve Bank of India’s today’s monetary policy statement draws a fine balance between the challenges posed due to COVID-19 pandemic shock and the need to support growth and financial stability. On the macroeconomic front, the outlook to growth continues to be negative with RBI refraining to give any number to the extent of GDP contraction on account of COVID-19. The asymmetric recovery across rural and urban areas poses challenge in policy formulation. The outlook on inflation is equally uncertain as supply shock has limited the scope of monetary policy in containing risk. On the balance, demand shock appears to net out the supply shock on price levels.

On the regulatory and development policy front, the RBI has carefully addressed the concerns emanating from the wider market participants. Notably, the RBI has addressed the need to offer some form of restructuring facility for standard accounts that are facing difficulty in debt restructuring. We welcome the fact that a new Resolution Framework for COVID-19-related Stress facility has been extended to large corporate, SME and personal loans with necessary safeguards in each segment.

The announcement on CRR, mechanism to check and track multiple operating accounts by large borrowers will benefit the industry at large. Harmonising the capital charge for market risk for debt and equity mutual funds is also a good move towards capital conservation given the volatility has increased after COVID-19 pandemic. In conclusion, the decision to hold the policy rate is a prudent one in the prevailing circumstances as the trajectory of economic growth, inflation and external demand continues to remain uncertain. RBI’s calibrated approach is in perfect consonance with evolving situation while keeping enough headroom for the future.

The resolution plan announced by the RBI is big relief to the entities who are under severe stress due to pandemic situation.Harmonisationof capital charge for market risk to bode well for the corporatebond market. Additional liquidity facility provided toNABARDandNHBwill further support credit push in the economy. Revision in the priority sector lending guidelines will ensure credit pickup in the areas where it is yet to see any traction. With persistent economic growth concerns, we expect that the RBI is likely to announce addition rate cuts at opportune time after assessing the situation.

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The MPC’s decision to keep rates on hold is in line with our expectation. Although the committee delivered large rate cuts since the onset of COVID-19, credit growth has been falling consistently. This shows that the ability of monetary policy in stimulating growth is constrained in the current situation. The MPC’s unanimous decision to pause is an acknowledgment of the same.

However, the RBI took a series of measures outside the purview of MPC to provide support to stressed sectors. Measures such as loan restructuring, increased in LTV for gold loans, additional liquidity facilities for NHB and NABARD are expected to have favourable impact.

Today’s announcement by the RBI Governor is welcome as it addresses one of the long-standing requests by the real estate sector.The loan resolution plan, which allows for payment moratorium up to 2 years, for corporate and personal borrowers should provide a breather to stressed real estate developers and individual borrowers in the housing segment alike. We look forward to the recommendations of the Kamath Committee on the details for the real estate segment. We also welcome the announcement of further liquidity infusion to the tune of Rs 5,000 Crores to National Housing Board (NHB) which should be able to provide some relief during these times of crisis.

While the sector was looking at a further revision in policy rate, to boost demand, we appreciate the accommodative stance by the RBI, in the wake of high rate of inflation which may have necessitated keeping policy rates unchanged. The Governor revealed that real GDP of India will trend in the negative territory for majority of FY 20 – 21, which causes concern for the real estate sector as economic growth and stability is a key ingredient for its long-term growth.

We hope that these measures will provide relief to the real estate sector and help them maintain their status till the economy starts to regain its growth momentum.

The RBI MPC’s decision on keeping policy rates unchanged was not unexpected. The efficacy of rate cuts is anyway low in the current juncture and the past rate cuts are still feeding into the system. The MPC was cautious with adequate concerns on the evolution of inflation trajectory while being fully supportive of growth prospects as and when inflation trajectory allows. We expect the RBI to pause in the near term with possibility of rate cut (if any) visible from the December policy when inflation starts to fall. Going forward, liquidity measures will be important to watch for as the central and state governments borrow heavily under the revised borrowing plans. More importantly, the RBI allowed for resolution plan under the June 7, 2019 notification ofPrudential Framework for Resolution of Stressed Assets along with a separate framework for personal loans too. This will help in alleviating some of the stress that is likely to emerge as well as address some of the most affected sectors. The provisioning norms along with rule-based and time-bound resolution plan will likely ensure that banks are prudent in utilizing this window and addresses genuine stressed cases.

"RBI's caution on rates is driven by the fact that retail inflation is rearing its ugly head with food inflation remaining sticky and higher. RBI therefore expects elevated inflation readings for a few more months, although core inflation is soft. The positive thing is that RBI would continue to be watchful and has not yet cried halt to the easing cycle," said RK Gurumurthy, Head – Treasury, Lakshmi Vilas Bank.

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