Views of Mr. R.K.Gurumurthy

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

on the RBI Monetary policy announcement today

 Quote

 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.

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”

Views of Mr. R.K.Gurumurthy, Head

Views of Mr. R.K.Gurumurthy, Head – Treasury, Lakshmi Vilas Bank on the FM announcement today

“Following a massive economic relief package announcement by the Prime Minister last night, the Finance Minister announced the first tranche of economic package that aims predominantly to address the economic woes faced by MSMEs and NBFCs.

The Government is firing on all cylinders. Today’s package is worth INR 6 Trillion and aims to infuse INR 3 Trillion collateral-free automatic loan facility with 100% credit guarantee to Banks and NBFCs for on lending to standard MSMEs.

 The scheme is available until 31st October 2020. The loans will carry lower rates of interest and comes on top of a re-definition of MSMEs for the purpose of incentivising growth and eligibility to borrow.

The package also envisages infusion of Rs 30,000 Cr special liquidity for investments to be made in primary and secondary markets in investment grade debt instruments issued by NBFCs/HFCs and MFIs, which will be fully guaranteed by the Government of India.  Additonal 45,000 cr support is also provided with a partial guarantee scheme for investments in AA or even unrated bonds, with a first loan loss of 20% to be borne by the government.

Today’s package,  the first in various tranches, will go a long way in resuscitating a section of the smaller and medium sectors of manufacturers that have been devastatingly affected by COVID-19 pandemic. These measures will also provide a strong base for the Make In India or the Aatmanirbhar initiatives.”