‘RBI was as dovish as it could be without cutting rates; MPC likely to hold rates in December policy’

RBI’s decisions were focused on supporting growth even though space for rate cuts remains restricted. (Bloomberg)

The RBI MPC as expected kept policy rates unchanged. However, in line with recent policies, the RBI focused on ensuring adequate liquidity in the system. The decision to conduct open market operations (OMOs) in state development loans (SDLs) will be essential to keep borrowing costs stable as states look to borrow heavily in 2H FY21. The increase in the size of each OMO operation for GSec will also aid in assuaging market concerns on RBI’s intended direction.

On the credit creation front, the TLTROs may not find immediate takers though at the margin will help the corporate debt market. However, the decision to shift the criteria for risk-weights to only LTV away from a combination of loan sizes and LTVs could be positive for real estate sector lending, especially for high-ticket loans. Overall, the RBI’s decisions were focused on supporting growth even though space for rate cuts remains restricted.

The RBI MPC also finally provided its estimates for GDP growth and inflation. The RBI till now had refrained from providing any estimates. The GDP estimate of (-)9.5% is in line with market expectations. We expect growth to be a tad lower at (-)11.5%. This is a guiding point of the policy decisions now rather than inflation which the MPC estimates to range between 5.4-4.5% in 2HFY21. We believe that if growth disappoints further, the MPC will have the scope to reduce rates once inflation inches closer to 5% rather than waiting for it to reach around 4%. The MPC will likely gauge the need and space for the rate cut in the February policy with the pause continuing in the December policy.

Also read: As economic activity returns and inflation pressure rises, interest rates may go up: HDFC’s Keki Mistry

Governor Das made two interesting statements: (1)” Financial market stability and the orderly evolution of the yield curve are public goods and both market participants and the RBI have a shared responsibility in this regard”, and (2)” We look forward to cooperative solutions for the borrowing programme … it takes at least two views to make a market, but these views can be competitive without being combative”.

This should be seen as moral suasion from the RBI to ensure smoother liquidity and yield operations. The increase in the individual OMO sizes to Rs200 bn and introduction of OMOs in SDLs should bode positively for the markets. Also, to provide further certainty of its actions, the RBI extended the dispensation of enhanced HTM limits of 22% up to March 31, 2022, for securities acquired between September 1, 2020, and March 31, 2021.

The on-tap TLTROs may not be of much help in the near-term as banks remain averse to taking on credit risk. However, if the incipient growth upticks were to sustain across key sectors, banks can use this window to either invest in corporate debt space or lend. It will be interesting to see whether large ticket mortgage loans get a boost due to the change in risk weights, now linked to LTVs rather than loan sizes.

Overall, the RBI was as dovish as it could be without cutting rates. The MPC will likely continue on a pause in the December policy. It is early, given the uncertainties around growth, to be sanguine on further rate cuts. However, the RBI will remain accommodative as long as required and would continue focusing on growth not just through policy rates but also through liquidity and regulatory measures.

Suvodeep Rakshit is Senior Economist in Kotak Institutional Equities. Views expressed are the author’s own.

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