Five things to watch out for in RBI’s monetary policy announcement

Reserve Bank of India Governor Shaktikanta Das will announce the policy decision of the Monetary policy committee on Thursday at 11:45 am, a shift from the normal schedule due to the downpour. What is also unique about the meeting this time is that the MPC members complete their four year cycle since its inception on 29 September 2016. Here are the 5 things to watch out for.

1. Rate Action

Majority of bankers and economists are expecting the MPC to keep its powder dry and announce a status quo policy after three days of deliberation. A Mint survey had showed that six out of 10 bankers polled expect RBI to keep policy repo rate on hold at 4%, while the rest are expecting a 25 basis points cut. This is contrary to a Bloomberg poll of 44 economists which showed that the street remains divided with 22 economists expecting a 25 basis points cut, one projects a 50 basis points move and the rest see no change. Many who are expecting a pause also believe that the space for further rate cuts is limited as RBI is near the rate cutting cycle. Hence, they believe that it would be prudent for RBI to act in the October meeting once they have greater clarity on both growth and inflation. However, a majority of the respondents polled by Mint also expect RBI to do a 50 basis points rate cut before the end of the financial year.

2. Growth & inflation outlook

Since the last surprise MPC meeting in June, growth outlook has worsened and inflationary pressures have mounted. The finance minister said on Tuesday that the prospects of India’s economic recovery have remained “fragile” because of a surge in covid-19 cases and frequent lockdowns. Ratings agency Icra had estimated India’s GDP to contract by 9.5% from its earlier forecast of 5% contraction. The consumer price inflation (CPI) which jumped from 5.8% in March 2020 to 7.2% in April 2020, softened to 6.1% in June 2020 as lockdown lifted. While inflation is expected to spike in July due to the localized lockdowns and fresh supply disruptions, it is expected to ease in the second half. Economists are expecting inflation to fall to 4.5% in the second half of the fiscal year.

3. Credit growth & rate transmission

While policy transmission has been visible, the banking system is yet to see a pick-up in credit growth. With the 115 bps reduction in repo beginning February, banks have already transmitted 72 bps to the customers on fresh loans, the fastest policy rate transmission in India. Large banks have already transmitted as much as 85 basis points. However, non-food credit growth on a year-on-year basis slowed to 6.7% in June compared to 6.5% in May and 7.2% in April. Hence the MPC could throw some light on the pace of transmission of rate cuts.

4. Unconventional measures

Bankers and economists are also expecting RBI to announce unconventional measures like raising the Held To Maturity Limit (HTM) for banks, open market operations and exercising yield management tools like “operation twist”. The large government borrowing programme this year has increased the pressure on the RBI to conduct OMOs to prevent a sharp rise in long term yields. However, with system liquidity already at a surplus of ₹6 lakh crore, conducting significant amount of OMOs could become challenging. The Street is therefore expecting RBI to raise HTM limits for banks instead. This will open up space for banks to absorb some of the supply of bonds and reduce the amount of OMOs required.

5. Restructuring package

The market is also expecting RBI to announce a restructuring package with special focus on certain sectors affected by the pandemic. Banks have requested the RBI to allow a one-time recast of stressed assets in the wake of the covid-19 pandemic and the havoc it has caused to businesses, small and large. Extending the moratorium on loan repayment however seems to be ruled out after industry heads like Deepak Parekh of HDFC and SBI chairman Rajnish Kumar have urged RBI not to extend the moratorium.

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