RBI MPC: Experts say announcements displayed courage, committee mindful of recent spike in CPI inflation

The announcements made by Reserve Bank of India governor Shaktikanta Das on Thursday morning were a combination of courage and conviction, and in no way suggests a U-turn in interest rate trajectory, believe experts. The RBI had kept interest rates unchanged to help tame inflation that in recent times had surged past 6 per cent mark, and said that the economy is in an extremely weak condition following the pandemic. 

“Drawing on the Governor’s statement in announcing the RBI Policy earlier today – the RBI displayed a combination of courage and conviction; commercial expedience and calibration in their announcements today. These announcements will help rebuild resilience and stability in both the real and financial sectors,” Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas said. 

The central bank also allowed lenders to restructure corporate and MSME loans as well as raised the limit of loans that can be availed against gold ornaments and jewellery. 

“The announcements relating to restructuring are an appropriate amalgam of proactiveness and prudence. By permitting restructuring of loan accounts which were standard on March 1, 2020, RBI has restricted the relief to those viable businesses stressed on account of COVID 19 and therefore obviated any moral hazard concerns,” Shroff added.  

WATCH Zee Business LIVE TV Streaming Online

Addressing the media, Das also announced a Rs 10,000 crore additional special liquidity facility for the housing sector and smaller non-bank finance companies (NBFCs). To deal with economic disruptions caused by COVID-19, RBI allowed lenders to implement a resolution plan for corporate loans without change of ownership. 

“When a Borrower was in default, there always existed a question of whether a lender by providing additional financing is actually putting in good money after bad. By clarifying that additional finance granted pre implementation would enjoy a ‘standard’ classification, the Borrowers have an additional line of credit available to ensure that working capital needs are specifically taken care of, without any risk of asset classification,” Veena Sivaramakrishnan, Partner, Shardul Amarchand Mangaldas & Co said. 

The biggest announcement, however, was that after cutting interest rates by 115 basis points since February, the Monetary Policy Committee (MPC) after three days of deliberations voted unanimously to leave the policy repo rate unchanged at 4 per cent. 

“Status quo was on expected lines. Today’s inaction in no way suggests a U-turn in interest rate trajectory. The MPC members have been mindful of the recent spike in CPI inflation, hence the inaction seems valid. Growth worries remaining, the accommodative bias suggests scope for further easing as inflation recedes in the second half of Fy21. We expect benign rate scenario to remain conducive for bonds,” Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak Mahindra Asset Management Company explained.