10,066.0586.95
Stock Analysis, IPO, Mutual Funds, Bonds & More

RBI policy post-mortem: Liquidity is okay; what about risk aversion?

This is how economists and market analsysts reacted to RBI's move to slash repo rates.

ETMarkets.com|
Last Updated: May 22, 2020, 12.39 PM IST
0Comments
AFP
RBI-3---AFP
The reverse repo rate was also reduced by 40 basis points to 3.35%.
The Reserve Bank of India (RBI) on Friday unexpectedly slashed its key policy rate for a second time this year, in a move to counter the economic fallout from an ongoing nationwide lockdown to contain the spread of the novel coronavirus.

It cut the repo rate by 40 basis points to 4%. The reverse repo rate was also reduced by 40 basis points to 3.35%.

This is how economists and market analsysts reacted to the development:-

Deepthi Mathew, Economist, Geojit Financial Services
By cutting the repo rate and reverse repo rate, RBI aims to inject more liquidity into the system. However, more importantly, what is needed is to remove the risk averseness as there is substantial liquidity in the banking sector. The rising food inflation rate could be a challenge to RBI as it is following the inflation targeting regime. Similarly, the extension of the moratorium would bring in some relief to the borrowers, but it can put pressure on the bank's balance sheet.

Suvodeep Rakshit, Vice President & Sr Economist, Kotak Institutional Equities
The RBI’s decision continues to indicate that they remain proactive. With the indication that the growth will be negative, we continue to see space for some further rate cut though the efficacy of rate cuts will progressively be lower. The extension of the moratorium bodes well. However, broader markets will focus on liquidity measures such as the path of OMO purchases (preferably a calendar) and regulatory measures to ensure both liquidity and solvency concerns are adequately addressed. Also, given the various dislocations that can emerge in the financial sector, markets will be focused on further steps by the RBI to safeguard the banking system (and broader financial system).

Dhiraj Relli, MD & CEO, HDFC Securities
The RBI statement offers reliefs across a whole host of areas. The cautious language in the statement of the governor raises concerns about the state of the economy and its path going ahead. The markets have initially reacted negatively to the RBI announcement. At a time when close to two thirds of the country is under lockdown, the Street keeps expecting more and more reliefs without knowing how each of these will be helpful. Bank shareholders are worried about the current economic conditions and the pain that is getting postponed due to the moratorium.

Sujan Hajra, Chief Economist and ED, Anand Rathi Shares & Stock Brokers
Rate cut of 40 bps is line with expectations as also extension of loan moratorium. The measure to convert the moratorium interest payment into a term loan payable in course of FY21 is the most important announcement. This can reduce NPA, at least in the next 12 month. The additional liquidity measures remain rather muted. The RBI also remains circumspect on growth and inflation outlook.

VK Vijayakumar, CIO, Geojit Financial Services
RBI, which has been proactive in recent times, has risen to the occasion by advancing the policy meet to cut policy rates by 40bp. Also, the unequivocal statement that monetary policy will continue to be accommodative till growth revives sends positive signals. The fact that the central bank has refrained from giving a GDP growth figure is a reflection of the complexity in giving projections with the present growth models. Extension of the moratorium announced earlier by another 3 months is a relief. A takeaway from the policy announcement is that the stress in the banking sector will continue.

Abhishek Goenka, Founder & CEO, IFA Global
It was indeed a good policy by RBI . Extension of moratorium and converting the interest into term loans which essentially increases the payback cycle , swap facility for exim banks , extension of import payments and increasing the exporters length of credit to 15 months from one year are steps in the right direction and eases the liquidity situation with export and import companies. Rate cut and reverse repo rate cuts are moves in the right direction but risk aversion by banks is still there. Some restructuring of the loans news would have been a step in the right direction which the market was awaiting. Broadly it may be better for companies but banks may get hit in the short term. Overall the bonds rallied with yield on old 10y benchmark falling 15bps in a knee jerk reaction. Rupee moves are fairly muted since we have huge selling interest by nationalized banks, likely on behalf of RBI at 75.85 levels. Of course the equities and banks initial reaction is negative.

Rajat Rajgarhia, Motilal Oswal Financial Services
RBI continues to support on the Monetary front by doing out of turn MPC meets to cut rates. Lowering the cost of capital is some relief in these times. Moratorium extension was expected, considering the economic activity levels. India would need more measures on a continous basis on both fiscal and monetary front to revive the economy from the current phase of negative growth!

Kumaresh Ramakrishnan, CIO, Fixed Income, PGIM India Mutual Fund
RBI maintained its accommodative stance with a promise to ease further as it expects inflation to fall below 4% in H2. Outlook for growth remains weak with contraction expected in H1FY 20 and a slight reversal in H2. The moratorium for borrowers has been extended for another 90 days in keeping with the lockdown taking the total to 180 days. Surplus liquidity, a dovish stance and weak growth conditions should pave the way for further rate easing in the months ahead, causing yields to rally. Given this background, we remain overweight on high grade short-term funds with duration in the 3-4 years.

Abhimanyu Sofat, VP-Research, IIFL Securities
The commentary of the governor speech underpins the low prospects of a V shaped recovery. RBI commentary indicate the stress in the economy on both demand and supply is likely continue. We also believe government should provide subvention on existing loans or bear some cost of the haircut of existing loans. This would ensure more confidence to banks to lend to lower rated entities or individuals.

Naveen Kulkarni, Chief Investment Officer, Axis Securities
The rate cut announced today will have limited impact in the short term, but it is helpful to revive growth over the longer term. However, the decision to extend the moratorium period by another 3 months is a significant negative for the private banks both in the medium and long term. The impact on the banking sector will be negative.

Dr Joseph Thomas, Head of Research, Emkay Wealth Management.
The further cut in the repo rate by the RBI is more or less in line with expectations by majority of the market participants. The cut has been effected considering the fact that there is growing economic and financial stress on account of the pandemic involving all major sectors of economic activity. This would help in bringing down the market rates as also lending rates mostly at the short end of the curve. The potential reduction in the cost of funds and the extension of moratorium will be supportive of financial stability which is of extreme importance as of today. We expect the rates across the curve to move lower from the current levels ,though on a risk adjusted basis , the short to medium term would hold better value for long term investor portfolios. In view of the large issues at the primary for the rest of the year from both central and state governments, the likely gains at the long end may come with elevated risks. The fall in the reverse repo rate would serve as a disincentive to banks who hold huge sums of liquidity to look at alternatives including gilts.

Also Read

‘Leave deficit monetisation to RBI’

RBI clears fog on special provisioning

Highlights of RBI's monetary statement

Chidambaram attacks govt for discontinuing RBI bonds scheme

Govt may get RBI to monetise deficit

Comments
Add Your Comments
Commenting feature is disabled in your country/region.

Other useful Links


Copyright © 2020 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service