- In line with our expectations, the RBI kept its repo rate on hold at 4%, citing the uncertainty around both inflation and growth as the reason behind this “wait and watch” approach. The policy corridor was also kept unchanged, with the reverse repo at 3.35% and the MSF rate at 4.25%.
- RBI stance: The RBI continued to keep its policy stance as accommodative and mentioned that supporting economic recovery assumes primacy in the conduct of monetary policy.
- More rate cuts ahead? In terms of forward guidance, the RBI highlighted that while there is still space for further rate cuts, it would like to use this space more “judiciously” when its most effective. Depending on the inflation trajectory, we see room for further rate cuts – between 25 to 50bps- in H2 FY21. Bottom-line: RBI is likely to use the limited space available for rate cuts prudently and wait and watch for further clarity on growth and inflation before cutting again.
- Growth and Inflation Expectation: The central bank refrained from announcing specific forecasts for growth and inflation for the year. However, it said that it expects GDP growth to contract in FY21 and inflation prints to remain elevated in Q2 FY21 before moderating in H2 FY21. Going forward, the RBI remained cautious over the upside risks for inflation, including – protein-based food inflation, cost-push pressures due to high fuel pump prices, and any disruption in supply leading to higher food inflation.
- Regulatory changes: The more important announcement today was the resolution framework for COVID- 19 related stressed borrowers. The RBI introduced a special restructuring window under the earlier “Prudential Framework of Stressed Assets” (June 2019) for corporate and personal loans, subject to specified conditions and safeguards. The details of the same are still awaited. Furthermore, the RBI also extended the restructuring framework for MSME debt, already in place, for MSMEs that have been hit by the pandemic.
- The disappointment: The RBI did not announce any changes to the current HTM limit at 19.5% for banks. As highlighted in our recent report (Monetary Policy Preview, 4 August 2020), in the absence of an increase in the HTM limits, the pressure on the RBI to conduct a larger quantum of OMOs is likely to rise. This could be challenging with the existing liquidity surplus at over INR6trn (as of July-end). What this essentially means is that the pressure at the long-end of the yield curve could rise.
- Bond View: The 10 year 05.79% yield (introduced in May 2020) and the new 10-year 05.77% inched up by 3-4bps post the policy announcement. We expect yields to remain range-bound in the near term, with a slight upward bias. Although, any significant upside is likely to be capped by yield management tools like Operation Twists conducted by the RBI. Over the medium term, the outlook remains uncertain and is likely to be influenced by any announcement (or the absence of) around OMOs or raising HTM limits.
- The Specifics:
- Key regulatory measures announced:
- 1. Resolution framework for COVID related stress: A window will be provided under the Prudential Framework (introduced in June 2019) to enable lenders to implement a resolution plan without a change in ownership for corporate and personal loans.
- o Borrower accounts that were classified as standard for more than 30 days with the lenders as on March 1, 2020, will be eligible
- o Lenders to keep additional provisions of 10% on the post-resolution debt
- o Resolution plan may be invoked anytime till December 31, 2020
- o RBI to constitute a committee under KV Kamath which will make recommendations on the required financial parameters and safeguards.2. Restructuring of MSME debt: The RBI allowed stressed MSME borrowers to restructure debt if their loans classified as standard with the lender as on March 1, 2020. This restructuring shall be implemented by March 31, 2021. This is an extension of the already present restructuring framework for MSMEs that is in place as of January 1, 2020.3. Investments by banks in Debt Mutual Funds and Debt Exchange Traded funds (ETF): Currently, if a bank holds a debt instrument directly, it would have to allocate lower capital as compared to holding the same debt instrument through a Mutual Fund (MF)/ETF. It has now been decided to harmonise the differential treatment existing currently. This is likely to result in substantial capital savings for banks and is expected to give a boost to the bond market.
4. Other announcements include:
o Borrowing against gold jewellery: To increase the loan to value ratio (LTV) for loans against gold ornaments from 75% to 90%. This facility available till March 31, 2021.
o Additional liquidity of INR 5000 cr. at repo rate to NABARD and INR 5000 cr. to National Housing Bank Inflation outlook: While the RBI refrained from giving a headline CPI inflation number, it highlighted that the headline inflation is likely to remain elevated in Q2 FY21 and moderate in H2 FY21 on account of a favourable base. The RBI noted that disruption in the supply chain has weighed on both food and non-food inflation. The RBI reckons that factors such as higher domestic pump prices on account of higher domestic taxes on petroleum products, cost-push factors, higher food prices, volatility in financial markets and rising asset prices could pose upside risks to the inflation outlook.
o We expect headline CPI inflation to remain elevated in the near term, averaging 6.0% in Q2 on account of higher food prices and rise in core CPI (led by higher gold prices and some pent up in demand) and higher wages led by a shortage of labour. Looking at a broader time horizon, we expect CPI inflation to ease below 3% in Dec-20 supported by a statistical favourable base, contained food prices amidst healthy Kharif production and muted demand-side pressures that are likely to keep core CPI in check. On balance, we expect CPI inflation to average at 4.7% in FY21.
Average headline CPI inflation (%YoY): HDFC Bank estimates
Q1 Q2 Q3 Q4
6.5% 6.0% 3.6% 2.7% Growth Outlook: On the growth front, the RBI expects a healthy recovery in the rural economy supported by progress in Kharif sowing. The RBI expects a recovery in economic activity in Q3 and Q4 aided by gradual restoration of supply lines and some recovery in demand. For the full year, the RBI expects the growth to contract with downside risks emanating from deviations from the forecast in the case of sub-normal monsoon, global financial market volatility and
a more protracted spread of the pandemic.o We expect growth to contract by 7.5% in FY21, with a sharper contraction in Q1 and Q2, and recover somewhat in H2 FY21.
GDP Growth (%YoY): HDFC Bank estimates
Q1 Q2 Q3 Q4
-21% -11% 0.7% 1.5%Treasury Economic Research team
Disclaimer: This document has been prepared for your information only and does not constitute an offer/commitment to transact. Such an offer would be subject to contractual confirmations, satisfactory documentation and prevailing market conditions. Reasonable care has been taken to prepare this document. HDFC Bank and its employees do not accept any responsibility for action taken on the basis of this document.
Abheek Barua
Chief Economist
Phone number: +91 (0) 124-4664305
Email ID: abheek.barua@hdfcbank.comSakshi Gupta
Senior Economist
Phone number: +91 (0) 124-4664338
Email ID: sakshi.gupta3@hdfcbank.com
