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Pragmatic view taken by the RBI; still expect rate cuts going ahead

Madan Sabnavis, chief economist, CARE Ratings (Photo: PHOTO CREDIT: Kamlesh Pednekar)
This credit policy was always going to be of special interest for three reasons. The repo rate decision is of prime interest to the market, which normally wants it to come down. Hence, the MPC stance was important. Second, as we are now five months into the year, the Reserve Bank of India’s (RBI’s) take on gross domestic product (GDP) growth is something everyone was looking for. And third, after the moratorium and its extension, the central bank’s take on the future steps in terms of extensions, sector specific relief and restructuring of loans is something that was expected. 

The third point mentioned above is normally done outside the policy but given the circumstances, a call on this aspect was justified in terms of expectations. While liquidity considerations are also a part of the announcements, affirmative action was not to be expected given the large surpluses going into the reverse repo market. The Governor has said that all measures have improved transmission with the last four months witnessing 90 basis point (bps) decline in weighted average lending rate on fresh loans. 

The repo rate call was a tough one to take considering that inflation is high and at the upper level of the band. Going strictly by the book, a rate hike or change in stance could have been called for. However, if one goes back to March 2020 and the subsequent announcements in April and May, it is clear that the MPC was going to wear the bifocals and also look at growth which is definitely in the negative zone. The latest PMI numbers show that manufacturing is down, which can also be seen in other high frequency data. Therefore, growth considerations are of paramount interest. The call to leave all rates unchanged looks pragmatic on balance as food inflation is still high and core inflation has potential to move up. The accommodative stance is assuring. Quite importantly it has maintained that there is scope for further cuts, but also that it should be used judiciously to make it effective. 

On growth, the RBI has still been conservative and not committed to a number but retained the view that it will be negative for the full year. The central bank is positive on the rural economy, providing a lot of support to this negative growth that would otherwise have been deeper. The RBI is still optimistic that if the pandemic comes under control in the next couple of months, recovery in economic activity will be quicker and can moderate this negative number. Inflation has been projected to be elevated in the second quarter and then come down in the third quarter when the kharif harvest comes in. Quite clearly, the next policy will consider both these aspects. 

On the issue of stress resolution, the RBI has opened a window for banks to have resolution plans for companies which are otherwise strong, but facing stress under the June 7, 2019 circular. The restructuring of MSME debt till March 2021 would again be useful for this segment, which has been affected quite sharply by the lockdown. Here, the sectoral forbearance through such measures has not been included which can still be hoped for later.

Overall, the RBI’s policy has been reassuring on the tackling of stress in the system and kept hope for further cuts in interest rates in future if inflation comes down and a growth push is still required. This should satisfy the markets.

Madan Sabnavis is chief economist at CARE Ratings. Views are personal.

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