The outcome of the credit policy announced was certain and hence there is no surprise element. That said, the monetary policy committee (MPC) meeting has been waited for two reasons. First, there was a deferment in the date of the policy ostensibly because the three independent members were not appointed. Second, the new set of members are refreshing though all are from the academia and their stance would be of interest. The minutes, which would be released later, would throw light on the discussions, which in turn, will let the market judge the proclivities of the new experts.
With inflation targeting being the rule, the relentless high levels of CPI inflation were to be the barrier to any further cut in interest rates. In fact, waiting for another two months has its merit while taking a call on rates, as the economy is also supposedly showing signs of a recovery. With inflation rate also poised to move downwards, albeit gently, due to a combination of high base effect as well as tempering of food prices, there would be more justification for doing the same in the next policy. The declining inflation rate would also justify the rate cut action in the December policy. The RBI expects inflation to ease in Q3 and Q4 of the current fiscal 2020-21 with food prices coming down.
The RBI was also expected to provide a numerical dimension to its macroeconomic forecasts. So far, the central bank has been open on the subject and while indicating a negative growth rate has not attached a number which has been now put at -9.5% with downside risk. The RBI is talking of a three-speed recovery across different sectors and has indicated that a positive rate can be seen in Q4.
Presently, the demand for funds is limited and traction has been seen more in the SME side where there is a guarantee in place. Otherwise, growth in credit has declined in other segments like non-SME corporates and retail. There is also a major restructuring exercise on, which has not yet been spelt out by banks. It will take some more time before the RBI will review the situation and take a call on lending. It may be expected that demand for funds would also increase towards the end of Q3, as firms are able to assess their spare capacity given the prevalent demand conditions.
The markets are unlikely to be moved much as this position has been factored in. As the Governor spoke, the 10-year G-Sec yield remained at 6 per cent, showing how much this has been buffered. The bond market will still be largely driven by developments on the fiscal front as it has been observed that the 10-years rate have been intransigent in the 6-6.05 per cent region. This is unlikely to change in the absence of any significant development on that end.
Three important messages given by the Governor are positive for the market. The first is the assurance that the government borrowing programmes will be managed to ensure no liquidity issues arise. Second, open market operations (OMOs) are to be announced for state development loans (SDLs), which will provide more liquidity to the market and help to temper the yields that have increased sharply over G-Secs. Third, having on-tap TLTROs for Rs 1 trillion would be largely beneficial for various sectors.
The focus of the policy, hence, has been on liquidity provision in the right areas – corporate and governments and ensure that volatility in interest rates will be tempered across different segment. This is definitely more meaningful in today’s environment and repo rate is probably of secondary importance.
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