After RBI taps out-of-the-box measures to boost growth, will rate cuts have to wait?

With inflation raising its ugly head, the Reserve Bank of India (RBI) is not expected to cut rates anytime soon, analysts said.

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With inflation raising its ugly head, the Reserve Bank of India (RBI) is not expected to cut rates anytime soon, analysts said. With RBI’s unconventional measures including long-term repo operations, CRR exemptions, among others to boost the economy appearing positive as of now, these operations may see an extension going ahead, the analysts also said. The LTRO operations by RBI would reduce the cost of funds for the banks that can’t borrow up to three-year funds at repo rate but at their margin, Soumya Kanti Ghosh, Group Chief Economic Advisor, SBI, said in a report. “However, as compared to the overall deposits of the ASCBs (Rs132 lakh crore as on 14 February 2020), this amount of Rs1 lakh crore is not even 1%, so the impact on bank’s cost of funds will be miniscule, up to 1-2 bps. So, if RBI continues with these operations further then it can have some more meaningful impact on transmission”, Soumya Kanti Ghosh added.

The LTRO was used by the European Central Bank (ECB) during the European sovereign debt crisis to lend money at very low-interest rates to banks. The RBI provides one-year to three-year money to banks under LTRO at the existing repo rate, accepting government securities with matching or higher tenure in form of the collateral. The RBI recently received Rs 1.71 lakh crore in the third long-term repo operation (LTRO) for an amount of Rs 25,000 crore. The RBI will conduct another LTRO for three-year tenor worth Rs 25,000 crore on March 9, 2020. The RBI has already conducted two LTROs for Rs 25,000 crore each on February 17, 2020, and February 24, 2020.

Positive effects

The latest measures taken by the RBI are already showing positive effects, Rahul Bajoria, Chief India Economist, Barclays, said in a report. “These unconventional moves are already having a material effect on easing financial conditions, though their end impact on overall credit availability is still unknown. Sovereign yields have fallen materially while corporates are seeing lower borrowing costs, amid falling global yields”, Barclays report added. While retail inflation spiked to 7.59 per cent in January 2020, the Q3FY20 GDP growth rate stood at 4.7 per cent. The existing inflation is much above the upper tolerance band of the RBI.

“We think the RBI may extend the recent LTRO programme after its initial success, which could see the bank sector relying more on wholesale funding compared with deposits in the near term”, Barclays report also said.

“The long-term repo operations (LTRO) conducted so far, in batches of INR 250 billion each aggregating to INR 750 billion by Reserve Bank of India (RBI), have turned out to be a huge step among the strategic smart moves taken by the Central Bank for achieving multiple objectives. The measure has been successful in boosting credit growth and marginal yet smooth transmission of rates by the banks. Improving liquidity, reduction in banks’ cost of funds and easing interest rates, are all in line with BWR expectations”, Balkrishna Pipariya, Director, Brickwork Ratings, said.

Rate cuts

On future rate cuts, Rahul Bajoria, Chief India Economist, Barclays, said that even as inflation target breach appears temporary, the RBI may not further cut rates. The second half of 2020 may see some room for the resumption of an interest rate cut if inflation plunges below the midpoint of the target range, he added.

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