RBI decision to keep policy rates unchanged, additional steps to revive growth: Experts

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Updated: June 04, 2021 6:42 PM

Sheth added that the move would also help non-banking financial companies (NBFCs) as bulk of their customers are self-employed and working in these contact-sensitive sectors.

The RBI left the repo rate unchanged at 4 per cent and reiterated its commitment to keep its monetary policy accommodative, to help the economy recover from the world's worst outbreak of COVID-19.

Experts on Friday said the Reserve Bank of India’s (RBI) decision to keep the interest rate unchanged, along with announcement of additional measures including on the liquidity front, is expected to revive economic growth.

The RBI left the repo rate unchanged at 4 per cent and reiterated its commitment to keep its monetary policy accommodative, to help the economy recover from the world’s worst outbreak of COVID-19.

This is in addition to on-tap liquidity window of Rs 50,000 crore with tenors of up to three years at the repo rate till March 31, 2022. This was announced on May 5.

Several economists believed that given the rising risk aversion among bankers and the industry amid the second COVID-19 wave, the impact of the on-tap liquidity window opened for the contact-intensive sectors now needs to be seen and its time fiscal steps are taken.

The RBI on Friday also allowed banks to borrow as much as Rs 15,000 crore for lending to COVID-19-hit sectors such as the hotels and tourism industry. Further, an additional Rs 16,000 crore funding has been earmarked for SIDBI for lending to micro, small and medium enterprises (MSMEs).

Veena Sivaramakrishnan, partner at Shardul Amarchand Mangaldas & Co, said extending Rs 15,000 crore coverage to contact-intensive sector on a medium-term basis for 3 years was the need of the hour and seems to have been addressed.

“While the quantum may not meet the immediate needs of the economy, it would certainly benefit the borrowers who are otherwise healthy but are impacted purely by the pandemic to get this relief on an urgent basis,” she said.

V Swaminathan, chief executive officer of Andromeda and Apnapaisa, said maintaining interest rates, notwithstanding inflationary pressures, is indicative of the central bank’s desire to aid growth and loan demand during these tough times.

Viral Sheth, finance controller of Moneyboxx Finance, said the status quo on policy rates maintained by the RBI is on the expected lines given inflation risk and already high liquidity in the banking system.

“The on-tap liquidity to the tune of Rs 15,000 crore announced for contact-intensive sectors is a welcome relief measure for the economy as these sectors employ a lot of people,” he said.

Sheth added that the move would also help non-banking financial companies (NBFCs) as bulk of their customers are self-employed and working in these contact-sensitive sectors.

Rajeev Singh, director general of the Indian Chamber of Commerce (ICC), appreciated the RBI’s decision to step up its efforts to ensure liquidity in the system with another G-SAP worth Rs 1.2 lakh crore planned for this fiscal year.

Anagha Deodhar, chief economist of ICICI Securities, said measures announced by the RBI together are likely to keep financial conditions in the economy benign and support recovery.

Gaurav Awasthi, senior partner at IIFL Wealth Management, said the inflation projections need to be tracked aggressively given the emergence of commodity and food inflation globally since a comeback of inflation may make the job of the RBI more tricky going ahead.

CARE Ratings Chief Economist Madan Sabnavis said, “The COVID-19-loan book idea, first announced in the April policy, has now been extended to the contact-intensive sectors. This is a positive move for these sectors that are currently facing the brunt of the second wave.”

He added that so far, the on-tap TLTRO (targeted long-term repo operations) announced last October aggregating Rs 1 lakh crore has seen bids of worth only Rs 5,000 crore, while special long-term repo operation (SLTRO) for small finance banks worth Rs 10,000 crore has seen takers of only worth Rs 400 crore. “Keeping this in mind, the absorptive capacity of these announcements becomes critical.”

India Ratings also supports this view saying it is easier said than done because despite the RBI’s best efforts, most of the benefit of various liquidity measures during the first wave of the pandemic were largely cornered by the public sector undertakings and large corporates.

Its Principal Economist Sunil Kumar Sinha said, “We, therefore, believe the RBI is likely to continue with its accommodative policy stance while maintaining status quo on policy rate through 2021.”

CRISIL economists said the monetary policy space to support growth has become more limited, given the persisting risks to inflation from surging commodity prices.

While consumer price index (CPI)-based inflation remains within the target range for now, the MPC will remain watchful of pass-through from rising input costs. While this will restrain the RBI from making major policy changes, it is likely to continue using targeted instruments to maintain conducive financial conditions, they said.

On the revised growth forecast by the RBI wherein FY22 GDP growth is expected at 9.5 per cent, ICRA Ratings Chief Economist Aditi Nayar said, “Accelerated vaccine availability is central to this outcome as well as a lower inflation print, which RBI sees at 5.1 per cent that is inconsistent and cannot support even this growth.”

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