Further policy easing in Dec’19
The RBI monetary policy committee cut benchmark rates by 25bps on 4 Oct 2019, taking the repo rate to 5.15%. The cut was as crucial as the forward guidance, both of which reinforced the MPC’s dovish stance, says Radhika Rao, Senior Vice President and Economist at DBS Bank of Singapore.
Rao listed the key takeaways:
Unanimous cut, with one of the members voting for a bigger 40bp cut;
GDP growth forecasts was cut from 6.9% to 6.1% for FY20, based on 5.3% assumption in 2QFY20 and 6.6-7.2% in 2HFY20; 1QFY21 seen at 7.2%;
MPC noted that the widening output gap;
Inflation is expected to say below target over the next 2-3 quarters;
Forecasts were revised up slightly to 3.4% in 2QFY20, 3.5-3.7% in 2H and 3.6% in 1QFY21;
Other underlying assumptions – USDINR 71.3 (vs 69 in Apr MPR); oil prices – USD62.6pb (vs 67 in Apr MPR);
Forward guidance – MPC decided to “continue with an accommodative stance as long as necessary to revive growth”;
Proposals of the internal working group on liquidity managements are being assessed, not accepted as yet;
Transmission continues to be slow, with WALR down by 29bp by September and median term deposit rate down 26bps;
Minutes to be released on Oct 18.
Policy outlook: Door remains open for further policy easing in December and likelihood of more into 2020, possibility of which was flagged recently, believes DBS.
Besides rate cuts, more is required to ensure efficient policy transmission – surplus liquidity conditions, markets-driven lending rates and a stable financial system to allow all sectors to benefit from lower borrowing costs.
The proposed liquidity management framework stuck to status quo but, we suspect that the current environment will be perceived as one which requires liquidity support; a) because of sticky borrowing costs for non-banks and b) higher premia for certain credit-deficient segments.
On the second, to jumpstart transmission through the banking channels, the RBI has mandated banks to peg new floating, personal loans to external benchmarks starting October, vs the earlier practise of marginal cost of funds-based lending rates (MCLRs). Most public sector banks have opted for the RBI’s repo rate as a reference rate, plus a spread fixed by the bank and mark-up for operational costs.
Finally, financial stability will be a priority. After undergoing a challenging period in the past five years, India’s banking sector non-performing asset ratio has eased to 10.3% in Mar’19 vs peak of 11.2%, said DBS.
While the worst is likely behind, there are fresh concerns on the horizon – a) fallout of further rating downgrades in stressed sectors (real estate, construction, telecom etc.), which will carry ramifications on the banks’ books; b) manageable but rising exposure to non-bank institutions; c) news of balance sheet troubles in non-banks have reverberated through the credit and equity markets; d) with non-banks’ preoccupied with deleveraging and sorting out their asset-liability mismatch, incremental credit growth is likely to slow; e) Refinancing/ delinquency risks to surface on case by case basis. fiinews.com