Views of Mr. R.K.Gurumurthy, Head – Treasury, Lakshmi Vilas Bank
on the RBI Monetary policy announcement today
Festivities begin in bond street earlier than one expected. RBI’s MPC’s new combination of external members announced an operationally more dovish policy without cutting rates and should be a watershed event for the broader economy. In what is seen as a comprehensive approach to addressing both inflation and growth, the measures are a continuation of the accommodative stance we have seen over last 9 months.
Repo and Reverse Repo rates remain unchanged. Special dispensation for HTM holding extended until March 2022 with a provision to buy Government securities until March 2021 and hold the same in HTM to an extent of 22% of NDTL. OMO amount increased to 20k per auction, TLTROs made an on-tap facility and end-use is sector specific with thrust towards NBFCs. Current spurt in retail inflation considered transient and RBI sticks to earlier estimates and is optimistic of containing within its forecast range. Most creative and unconventional is the announcement of OMO Purchases of State Development Loans. This will ensure the states’ borrowing program is non-disruptive and the cost remains anchored to broader market realities. Other key measures include linking risk weight for home loans to LTVs and making RTGS a 24x7 payment system on the same lines of NEFT.
The policy measures recognize the growth risk the economy faces and the imperativeness of providing liquidity for growth. Recent measures and the cut-offs in auctions that RBI was not comfortable with higher yields and today’s policy reinforces that thought. Once inflation, which remains a supply-side disruption currently, softens, RBI should be willing to cut rates and we expect atleast a 35 basis cut this FY. The decision to hold rates steady would also help to protect NIMs of Banks as a majority of the loan book is linked to the Repo or other floating benchmarks.