Sunday, 24 May 2020

Views of Mr. R K Gurumurthy, Head - Treasury

Views of Mr. R K Gurumurthy, Head - Treasury, Lakshmi Vilas Bank 

on the RBI announcement today

RBI announces a surprise 40 basis Repo Rate cut, taking the official rate now to 4.0% and at 3.35%, the Reverse Repo rate is at its lowest. Demonstrating remarkable nimbleness and responding to the evolving crisis due to extended lock down, the cut in rates and other attendant measures should address the demand side by boosting consumption and disincentive savings. While expectations of further rate cuts of atleast 75 basis during the FY was rife, the timing and guidance will have a telling effect on rate transmission and buttressing supply side measures

After the series of announcements last week primarily as an economic rescue package to thwart the deleterious effects on growth, today’s rate cut is more a front loaded monetary measure in an environment where inflation is likely to remain low. Measures like extension of moratorium by another 3 months, increase in single exposure by 5 percentage points to 30%, extension of 150b rupee line to EXIM for swap facilities and export credit tenor increase by 3 months will support the small and large sectors of the economy, alike. 
Market Impact:  Bonds have rallied in response to this unexpected announcement.  Some profit taking and the overbearing caution that RBI continues to be vigilant and battle ready, would induce an element of volatility in prices. Given the uncertainties ahead on both growth and need for further monetary and fiscal support, markets may start expecting some special dispensation on HTM holdings of Government Securities

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