As the Indian and the global economy battles the fallout of the coronavirus outbreak, it is clear that the market seeks more than just rate cuts from the Reserve Bank of India in these trying times.
On August 6, the central bank’s monetary policy committee (MPC) left the repo rate and reverse repo rate unchanged but the market still jumped by about a percent.
Ahead of the meeting, analysts and economists were of the view that the MPC would have to grapple with growth or inflation question but all the six committee members voted for maintaining the status quo.
The MPC kept repo rates unchanged at 4 percent and the reverse repo rate at 3.35 percent, keeping the stance accommodative.
This rules out rates as a significant trigger for the market. So what pushed it higher?
A raft of measures that addressed concerns of the banking industry along with providing relief to the economy.
Of late, the market is obsessing less over policy rates and focusing more on other measures being taken by the RBI. Liquidity, indeed, is a vital factor for the market but the central bank can deploy other methods to introduce liquidity in the system.
Markets are taking comfort from the fact that the liquidity situation has improved significantly.
Even though India’s macroeconomic indicators continue to flash the distress signal, the RBI picked inflation over growth, leaving rates unchanged but also offered a lot more.
Among the biggest steps were the restructuring of loans for MSMEs and the resolution framework for COVID-19-related stress.
Additional special liquidity facility of ₹5,000 crore each for the National Bank for Agriculture and Rural Development (NABARD) and National Housing Bank (NHB) and allowing more borrowing against gold ornaments and jewellery showed the RBI’s intent to combat the impact of the viral outbreak.
The RBI acted judiciously by keeping the rates unchanged, said Deepthi Mary Mathew, Economist at Geojit Financial Services. The surplus liquidity in the banking sector and the chances of inflation remaining high in Q2FY21 guided the decision.
“One of the major announcements was with regard to raising LTV (loan-value ratio) for gold from 75 percent to 90 percent. This would be beneficial to the Indian households in the wake of rising gold prices,” Mathew said.
Have rate cuts ceased to be a trigger for the market?
It will be foolish to assume that the market will remain indifferent to rate decisions.
In a normal situation, a rate cut would give a boost to the market. But we are living in unprecedented times, a rate cut would have been a non-event as the central bank had already lowered rates significantly this year and is keeping room for exigencies.
“There were not many expectations regarding rate cut and hope was regarding a stoppage of moratorium and restructuring of loans. The RBI has acted judiciously by keeping rates unchanged due to surplus liquidity in the system and elevated forecast for inflation in Q2FY21,” said Vinod Nair, Head of Research at Geojit Financial Services.
High non-performing assets (NPAs), or bad loans, were a big concern for the banking industry. Restructuring of loans for companies impacted by COVID and raising the LTV ratio for gold from 75 percent to 90 percent was a positive for the economy and banks, which also enthused the market, Nair said.
The decision on rates and steps to ease the coronavirus distress while shoring up the economy has to work in tandem for a better impact. Rates remain important but as the coronavirus redefines “normal”, the market, too, expects more than the ordinary from the central bank.
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