RBI Policy Decisions Live: MPC Leaves Rates Unchanged; RBI Allows One-Time Restructuring Of Corporate Loans

The one-time restructuring of assets in stress because od the Covid-19 pandemic was the need of the hour, according to Abizer Diwanji, Partner & National Leader, Financial Services EY India.

• This being done was the need of the hour, not with the intent of hiding what the stress on the banking system is because most banks and NBFCs have announced their capital raises and the government will support the PSU banks in their capital raises.
• What’s important is, if a one-time restructuring is done without classification, the system there is able to support the revival of a standard company much better than an NPA company.
• I am of the view that they should not have had this cut off because there are companies which are impacted because of Covid and second, there are companies whose revivals are impacted because of Covid.
• The circular says that people who are likely to turn NPA because of Covid or require a restructuring because of Covid are exempt but my view is that every company is impacted of Covid.
• I think the sectoral benchmark is a brilliant idea. It will keep all the companies in check.
• I think that if you have an oversight of every plan above Rs 1,500 crores of total debt, that may create some bottlenecks and I don’t know how the committee will then function.

Watch the full conversation here:

Jaideep Iyer, RBL Bank

One-time restructuring for Covid-19 stressed accounts a step in the right direction, says RBL Bank'shead of strategy Jaideep Iyer.

• Good companies with no cash flow for six months cannot be penalised.
• Appropriate guidelines important to prevent the repeat of mistakes made in 2009.
• Banks will restructure accounts only for businesses directly impacted by Covid-19.
• It will not go like the last time when all and sundry got restructured

Jayesh Mehta, Bank of America

An interest rate cut does not make sense right now, says Bank of America’s Jayesh Mehta.

• Inflation is going to be higher due to supply disruptions, as forecast by RBI.
• MPC will have policy space when inflation softens in H2 FY21.
• The most important need of the hour is restructuring, which they’ve provided for.
• Even with the best of safeguards there will always be some room for mischief.

Saugata Bhattacharya, Axis Bank

Repo rate already near India’s effective lower bound, says Axis Bank’s Chief Economist Saugata Bhattacharya.

• CPI inflation will be 6% or above for the next two months, at least.
• It will be difficult for an inflation targeting-MPC to cut rates in the next policy.
• Room to use conventional monetary policy tools is beginning to compress.
• See room for another 15-25 basis points rate cut, not much more than that.

"The world is bracing up for a second wave as it cautiously opens up. We shall remain alert and watchful and collectively do whatever is necessary to revive the economy and preserve financial stability,” said RBI Governor Das.

An incentive framework is being put in place for banks to address regional disparities in the flow of priority sector credit, says RBI governor.

• Most PSL credit gets concentrated in certain areas
• Higher weightage will be assigned for credit to identified districts with lower credit flow
• Lower weightage will be assigned to districts with higher credit flow
• Priority sector lending status is also being given to startups, says RBI governor.
• Limits for renewable energy including solar power and biogas plants are also being increased.
• Introduction of automated mechanism in e-Kuber system to provide banks more flexibility and discretion in managing liquidity and cash reserve requirements
• Putting in place safeguards for borrowers, with multiple borrower accounts, availing credit facilities from multiple banks

Other Announcements

• RBI to set up innovation hub in India
• Introducing mechanism of positive pay for all cheques above Rs 50,000
• Scheme of offload retail payments using cards and mobile devices and a system of online dispute resolution mechanism or digital payments will also be introduced

• LTV for loans sanctioned by banks against pledge of gold for non-agri purposes increased to 90% from 75 %
• Relaxation available till March 31, 2021

• National Housing Bank to get Rs 5,000 crore to shield the housing sector from liquidity disruption, augment the flow of finance.
• Nabard to get Rs 5,000 crore to ameliorate stress faced by small NBFCs and MFIs.

• To enhance liquidity support for financial markets
• To further ease financial steps caused by Covid-19
• To improve the flow of credit
• To deepen digital payment systems
• To augment customer safety in cheque payments
• To facilitate innovations across the financial sector

Borrowing costs have dropped to lowest in a decade due to abundant liquidity, Das said during his address

• NBFC commercial papers have softened to 3.8% as of July 31.
• Rates have fallen to 3.4% for non-NBFC borrowers, as of July 31.

The lower borrowing costs have led to record issuance of corporate bonds worth Rs 2.09 lakh crore in Q1 of FY21. Market financing conditions for NBFCs have also largely stabilised in the wake of RBI policy measures, Das said.

Mutual funds have stabilised since the Franklin Templeton episode and AUM of debt mutual funds have also recovered and improved to Rs 13.89 lakh crore, he said.

India’s real gross domestic product is expected to contract in the first half of the current financial year, the RBI governor said.

“Real GDP Growth for full year of FY 2020-21 estimated to be in negative as well.”

• Imports fell sharply in June in a broad based banner, merchandise trade balance recorded a surplus in June at $0.8 billion after a gap of 18 years.
• Forex reserves have increased by $56.8 billion to $534.6 billion in the current financial year between April to July.
• Early containment of Covid-19 may impart an upside to the outlook.

The committee expects headline inflation to remain elevated in Q2FY21, said the RBI governor. Headline inflation which was 5.8% in March was placed at 6.1% in the provisional estimates for June 2020, he said, adding that inflationary pressures were evident across all subgroups.

“Headline inflation likely to ease in H2FY21, aided by favourable base effects.”

The Indian economy had begun to recover from the lows of April and May, but the surge in cases have led to localized lockdowns, because of which several high frequency indicators have leveled off, says RBI governor.

Agriculture sector prospects have strengthen by the progress of the south west monsoon and the total area sown under kharif crops. Agriculture sector prospects have strengthened by the progress of the south west monsoon and the total area sown under kharif crops.

Here’s what Das had to say on the global economy:

• Global economy activity has remained fragile and a renewed surge in Covid-19 infections in July has subdued early signs of revival
• Global financial markets have been buoyant with return of risk off sentiment inserting a disconnect from the underlying state of the real economy
• Portfolio inflows to emerging markets have resumed.

India’s Monetary Policy Committee led by central bank Governor Shaktikantha Das unanimously decided to leave the repo rate unchanged at 4%.

In their meeting on 4th, 5th and 6th Aug., the MPC sifted through global conditions and evaluated their global impact on the outlook for India, Das said. The Committee is continuing with its accommodative stance as long as needed to revive growth and mitigate the risks brought on by the Covid-19 pandemic, the governor said.

While space for further monetary policy action is available it is important to use it judicially to maximise the beneficial effects on the underlying economy, Das said. As for now, a cumulative reduction of 250 basis points [in the policy rate] is working its way through in money, bond and credit markets and narrowing down the spreads, he said.

The committee will remain watchful for a durable reduction in inflation and use the available space to support the revival of the economy, he added.

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India’s Monetary Policy Committee is meeting this week against a backdrop of severe economic stress. The number of cases of Covid-19 detected in the country is still rising and local lockdowns have diluted the push to reopen the economy.

The Reserve Bank of India Governor Shaktikanta Das will announce the MPC's decision in a press conference at 12 noon today. This is the last policy meeting being held by the current MPC as the four-year term of the three external members comes to an end in September 2020.

While demand remains weak, there are signs that inflation isn’t yet responding to those conditions. This will pose a dilemma for India’s inflation targeting-MPC, which meets the last time under its current four-year term.

Economists are divided on whether the MPC will rule in favour of another rate cut. A Bloomberg poll of 44 economists shows that 22 expect another 25 basis point cut this week, while 21 economists expect a status quo. The economists at Rabobank expect a 50 basis points cut.

The MPC has already cut rates by 115 bps since the Covid crisis hit in March, bringing the repo rate down to 4%.