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RBI Monetary Policy: Experts discuss the rationale to keep repo rate unchanged at 4%

Updated : August 06, 2020 05:25 PM IST

The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) kept the repo rate unchanged in the August policy at 4 percent. The reverse repo rate has been maintained at 3.35 percent.

The central bank has maintained its policy stance at “accommodative” which could continue for as long as necessary to revive growth.

Among the important announcements, the RBI announced a relaxation on loan-to-value (LTV) ratio for gold loans from 75 percent to 90 percent. The relief will be applicable till March 31, 2021. The central bank has also decided to permit a one-time restructuring of corporate loans.

Speaking about the restructuring announcement, Dinesh Kumar Khara, Managing Director, Global Banking, and Subsidiaries of State Bank of India (SBI) said that it is a welcome step taken by the RBI.

“NBFCs, as well as banks, have been saying for some time that moratorium and block moratorium is not something which is required. It would be some kind of restructuring depending upon a case-to-case basis but with the best of the situation which would help in mitigating the hardships which are being faced by some of the sectors in the economy. I think to that extent it is a very welcome suggestion,” he said.

Speaking about the RBI’s policy rate, Taimur Baig, MD and Chief Economist at DBS Group Research said, “On the macroeconomic side, I think the market was wiser than the consensus. The consensus was 50-50 on the rate cut, but when you look at one year implied, that has come up substantially from where it was a couple of months ago and is 50 or 45 basis points below the repo rate. So, the market is thinking that we are coming towards the end of the rate cycle, for the time being, if there is room to cut rates next year, it is fine.”

Speaking about OMOs, Ananth Narayan, Professor at SPJIMR said, “One critical point which the governor spoke of is the use of OMOs for reducing the funding cost of private entities. It is the first time I have heard RBI speak of OMOs for anything other than liquidity management and I think it is very heartening for the market as a whole. Second, the fact that there was no rate cut, there was a minor sell-off in bonds, 6-7 basis points, but clearly the expectation is that OMOs will follow. While the governor was silent about OMOs and LTROs, etc. I think the expectation is they will come in when required to ensure that transmission continues into lending rates.”

Ananth further added that the rate cut is still on the cards. “We know from a statistical impact, the second half of this year will see lower inflation and at that point of time I think governor Das will be ready to spearhead a rate cut provided nothing changes dramatically between now and then,” he said.
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