Key Highlights of the Seventh Bi-monthly Monetary Policy Statement, 2019-20
- Repo Rate –reduced by 75 bps to 4.40% with immediate effect
- Reverse Repo Rate –reduced by 90 bps to 4.0%
- Bank Rate & Marginal Standing Facility (MSF) Rate – reduced by 75 bps to 4.65%
- Cash Reserve Ratio –The CRR of scheduled banks reduced by 100bps at 3.0% of their net demand and time liabilities (NDTL)(this will be effective 28th Mar 2020)
- TLTRO -New instrument in RBI’s arsenal of Rs 1 tn, importantly, at a floating rate linked to the policy repo rate.
The RBI preponed the monetary policy committee meeting date in wake of the urgent need to support the economy with a sizeable stimulus package.
The MPC voted unanimously for a sizeable reduction in the policy repo rate, while there were some differences in the quantum of reduction, the MPC voted with a 4-2 majority to reduce the policy rate by 75 basis points. The MPC also decided to continue with the accommodative stance as long as it is necessary to revive growth and mitigate the impact of corona virus (COVID-19) on the economy, while ensuring that inflation remains within the target.
Growth Outlook and Projection: The estimates of real GDP growth released in February 2020 (of 4.7% for Q4:2019-20) is now at risk from the pandemic’s impact on the economy. If COVID-19 is prolonged and supply chain disruptions get heightened, the global slowdown could deepen, with adverse impact for India too. Upside growth impulses are expected to emanate from monetary, fiscal and other policy measures and the early containment of COVID-19.
Inflation Outlook and Projection: CPI headline inflation was projected at 6.5% for Q4: 2019-20. The inflation outlook is expected to be shaped by several factors such as soſtening of food prices (also on account of the record production), collapse in crude prices and weakening of aggregate demand as a consequence of Covid-19. Further, heightened volatility in financial markets could also have a bearing on inflation.
Our View:
In our view, RBI has done just that by announcing an unprecedented monetary stimulus in addition to several Liquidity & Development measures to counter the severity of the pandemic and its massive impact on the Indian economy. While RBI has followed in steps of some of the other global central banks delivering huge rate cuts, it has also coaxed & encouraged banks to lend rather than invest in Government Securities. RBI unleashed a comprehensive set of easing with good reduction in rates, good liquidity boost, and regulatory/supervisory easing.
We feel that infusion of a cumulative liquidity of Rs 3.74 trillion at very low rates along with the regulatory relaxations (like 3month deferment of interest on working capital loans or 3 month moratorium on term loans) will help cash flow pain for borrowers as well as encourage lenders to start taking risks.
In that sense, TLTRO (Targeted Long Term Repos Operations) is a welcome new instrument, which should help ease credit spreads. This will increase fund flow towards corporate bonds and commercial papers.
Reduction in Reverse Repo means Banks will cut rates faster, help in quicker transmission of rates and help release primary liquidity of Rs1.37 trillion to economy.
This should put the recent debt market volatility behind us and make bonds attractive for investments given the drop in rates and provision of TLTRO. We advise investors to stay invested and focus at investing in these opportune levels in high quality portfolios from a 6 month to 3 yr perspective.
However, please note that we are still passing through the later stages of the credit crisis, hence, avoid incremental investment in credit risk.
Sources:
Various publications
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