Tag: repo rate

RBI keeps rates unchanged to support growth

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The Monetary Policy Committee of the Reserve Bank of India has decided to maintain status quo on key policy rates.

“The MPC took stock of the evolving macroeconomic and financial conditions and the impact of the second wave of Covid on the economy. Based on its assessment, the MPC voted unanimously to maintain the status quo on repo rates and maintain an accommodative stance for as long as possible to revive growth,” said RBI Governor Shaktikanta Das on Friday after the meeting of the MPC.

Also read: Monetary policy must remain accommodative

The policy repo rate remains unchanged at 4 per cent while the reverse repo rate is at 3.35 per cent.

The move comes amidst expectations of slowing growth after the second surge of the Covid-19 pandemic and local level lockdowns that have impacted economic activity. However, inflationary risks persist.

 

The RBI had kept key interest rates unchanged at the last MPC meeting held in April.

The RBI, in its Annual Report 2020-21, had also said that “the conduct of monetary policy in 2021-22 would be guided by evolving macroeconomic conditions, with a bias to remain supportive of growth till it gains traction on a durable basis while ensuring inflation remains within the target.”

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RBI’s MPC begins deliberations amidst hopes of status quo in policy rate

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The Reserve Bank of India’s rate-setting panel, Monetary Policy Committee (MPC), began its three-day deliberations on Wednesday amid expectations of status quo on the benchmark rate, mainly on account of uncertainty over the impact of the second wave of the Covid-19 pandemic.

Moreover, fears of firming inflation may also refrain the MPC from tinkering with the interest rate. . The outcome of the bi-monthly monetary policy meeting will be announced on Friday.

Also read: How the RBI managed a large surplus transfer to the Centre in a difficult year

The RBI had kept key interest rates unchanged at the last MPC meeting held in April. The key lending rate, the repo rate, was kept at 4 per cent and the reverse repo rate or the central bank’s borrowing rate at 3.35 per cent.

M Govinda Rao, Chief Economic Advisor, Brickwork Ratings, said the better-than-expected GDP numbers provide the much-needed comfort to the MPC on the growth outlook.

However, with the imposition of partial lockdown-like restrictions to contain the virus spread in several parts of the country, the downside risk on growth recovery has intensified, he said.

“Hence, the RBI is likely to continue with its accommodative monetary policy stance. Considering the risk of inflation emanating from the rising commodity prices and input costs, Brickwork Ratings expects the RBI MPC to adopt a cautious approach and hold the repo rate at 4 per cent,” he noted.

Dhruv Agarwala, Group CEO, Housing.com, Makaan.com and PropTiger.com believes the RBI can maintain its accommodative stance in light of the economic impact of the second wave of Covid-19, without endangering its key goal of keeping inflation under control.

Reviving growth has become an important objective due to the economic damage caused by the recent lockdowns, he said, and added the RBI should also consider providing more liquidity to the National Housing Bank to enable the stability of housing finance companies, which in turn will allow the real estate sector to expand.

Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank was of the view that in the current environment, the choices before the Monetary Policy Committee may be limited.

“With the second phase of the pandemic impacting consumption and growth, the MPC will likely maintain status quo on policy rates, continue with an accommodative policy stance and ensure adequate liquidity in the system – all in an effort to stimulate growth. While it will keep one eye on inflation levels on the back of rising global commodity prices, it currently will focus on supporting economic growth,” Ekambaram said.

According to Sandeep Bagla, CEO of TRUST AMC, “It is expected to be a no change policy, with continued economy friendly soft interest rate bias.”

The RBI annual report released last week has already made it clear that “the conduct of monetary policy in 2021-22 would be guided by evolving macroeconomic conditions, with a bias to remain supportive of growth till it gains traction on a durable basis while ensuring inflation remains within the target.” The Reserve Bank, the report added, would ensure that system-level liquidity remains comfortable during 2021-22 in alignment with the stance of monetary policy, and monetary transmission continues unimpeded while maintaining financial stability.

In the assessment of the RBI, the evolving CPI inflation trajectory is likely to be subjected to both upside and downside pressures. The food inflation path will critically depend on the temporal and spatial progress of the south-west monsoon in 2021.

The government has retained the inflation target at 4 per cent with the lower and the upper tolerance band of 2 per cent and 6 per cent, respectively, for the next five years (April 2021 – March 2026).

Also read: ‘RBI may keep repo rate unchanged’

Retail inflation, based on Consumer Price Index (CPI), slipped to a three-month low of 4.29 per cent in April mainly on account of easing of prices of kitchen items like vegetables and cereals. The RBI mainly factors in the CPI while arriving at its monetary policy.

As per the RBI annual report, supply-demand imbalances may continue to exert pressure on food items like pulses and edible oils, while prices of cereals may soften with bumper foodgrains production in 2020-21.

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‘RBI may keep repo rate unchanged’

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The rate-setting monetary policy committee (MPC) is likely to stand pat on the repo rate, in view of sticky inflation and dimming growth prospects amid the second wave of the pandemic.

The six-member MPC has held the repo rate rock-steady at 4 per cent since May 2020.

Retail inflation

Though retail inflation eased to 4.29 per cent in April from 5.52 per cent in March, the surge in wholesale inflation to 10.5 per cent in April from 7.39 per cent in March is expected to engage the committee members’ attention as it could spill over to the retail side.

The MPC will have to walk a tight rope; on the one hand it wants to rein-in inflation, on the other, it wants to support growth. Hence, MPC members may vote to keep the repo rate unchanged as well as continue with the accommodative policy stance.

“In the upcoming June 4 policy meeting, the RBI may want to sit tight in view of the high pandemic cases.

“We think the one change it might make is a markdown in the FY22 GDP growth forecast,” said Pranjul Bhandari, Chief Economist, India, HSBC Securities and Capital Markets (India) Private Ltd; Aayushi Chaudhary, economist; and Priya Mehrishi, associate, in a report.

Surplus liquidity

They observed that starting in Q4 (October-December) 2021, when the proportion of population vaccinated reaches critical mass, the RBI may start lowering surplus liquidity, raising the reverse repo rate, and change its stance to neutral.

“Having said that, an increase in the 4 per cent benchmark repo rate can wait for longer in our view,” said the economists.

The policy repo rate was last reduced from 4.40 per cent to 4.0 per cent on May 22, 2020.

“We believe that the Monetary Policy Committee has no option but to stay accommodative, even as it monitors incipient price pressures and keep all rates on hold, while likely extending its Government Securities Acquisition Program (GSAP),” said Rahul Bajoria, Chief India Economist, Barclays Securities (India) Pvt Ltd, and Shreya Sodhani, Research Analyst, Barclays Investment Bank, Singapore, in a note.

They emphasised that since May’s policy announcements, the growth outlook has degraded further, with greater evidence that inflation headwinds may remain persistent going into H2 (July-December) 2021.

However, with some relief on the virus caseloads, the RBI can balance its message around prospects for a return to economic normality.

In its Annual Report, the RBI observed that looking ahead, the evolving retail/ CPI inflation trajectory is likely to be subjected to both upside and downside pressures. The food inflation path will critically depend on the temporal and spatial progress of the south-west monsoon in 2021.

“Second, some respite from the incidence of domestic taxes on petroleum products through coordinated action by the Centre and States could provide relief, although international crude oil prices continued to be volatile.

“Third, a combination of high international commodity prices and logistic costs may push up input price pressures across manufacturing and services,” said the report.

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Banks’ lending spreads may have peaked, say analysts

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In fact, lending rates rose 16 bps for private banks on an M-o-M basis.

Lending rates fell in March from their February levels, but a simultaneous need to raise deposit rates may be causing spreads to peak out. The marginal lending spread — the interest rate on new loans minus new deposits — for the banking system has come off peak levels and declined by 16 basis points (bps) in March over February 2021, according to data released by the Reserve Bank of India (RBI).

At the same time, spreads remained high at an average of 4.6% for private banks and 3.2% for public sector banks (PSBs). The spread between the average lending rate on outstanding and fresh loans was 120 bps. While headline rates have fallen, spreads between long-duration and short-duration as also between AAA and AA have remained elevated, suggesting the spreads over loans both in products and duration is quite high, said Kotak Institutional Equities (KIE)

Analysts said a number of factors may have contributed to keeping spreads high despite a lack of credit offtake. These include the share of fixed-rate loans in the mix, higher-yielding unsecured loans (which are also fixed-rate) and pricing that seeks to offset the impact of higher bad assets.

Banks had earned higher spreads through the Covid phase as credit disintermediation was low and they could price products better, according to a note by Nomura. This could be set to change. “Assuming the cyclical recovery in loan demand picks up, banks may need to raise their retail deposit rates, even as wholesale deposit rates are off the lows since Jan-21. With new loans priced off the ‘repo’, a slower monetary policy move by the RBI may be negative on NIM, at the margins,” the broking firm said.

Also, the recent decline in spreads occurred largely on the back of a fall in average lending rate on new loans for foreign banks, which fell 80 bps month on month (MoM) in March. At a system-level, the average lending rate on new loans declined only 16 bps. In fact, lending rates rose 16 bps for private banks on an M-o-M basis.

Rate transmission is, therefore, far slower than what the headline numbers suggest. “In a relatively low growth and heightened risk environment, especially after Covid, we note that the spreads have continued to remain high,” KIE said, adding that the spread over G-secs with deposits and loan rates has widened. This implies banks are seeing a lower spread on investments and better spreads on loan yields.

Recently, State Bank of India (SBI) chairman Dinesh Khara said that the bank shall try to keep interest rates low for as long as possible with a view to supporting economic growth. It is not clear how long banks will be able to do this, especially considering a string of deposit rate hikes has already taken place. SBI, Housing Development Finance Corporation (HDFC) and Canara Bank have raised deposit rates in recent months.

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RBI’s MPC starts deliberating on next monetary policy

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Reserve Bank of India Governor Shaktikanta Das-headed rate-setting panel MPC started its three-day deliberations on the next monetary policy on Monday amid a sudden surge in Covid-19 cases and the government’s recent mandate asking the central bank to keep retail inflation around 4 per cent.

The RBI will announce the resolution of the Monetary Policy Committee (MPC) on April 7.

Also read: RBI seen leaving repo rate unchanged in first review of FY22

Experts are of the view that the RBI will maintain status quo on policy rates at its first bi-monthly monetary policy review for the current fiscal. It is also likely to maintain an accommodative policy stance.

The policy repo rate or the short-term lending rate is currently at 4 per cent, and the reverse repo rate is 3.35 per cent.

Last month, the government had asked the RBI to maintain retail inflation at 4 per cent with a margin of 2 per cent on either side for another five-year period ending March 2026.

Also read: Govt’s borrowing plan to mount pressure on G-Sec yields in H1

M Govinda Rao, Chief Economic Advisor, Brickwork Ratings (BWR), said given the rise in the spread of coronavirus infections and the imposition of fresh restrictions to contain the virus spread in the major parts of the country, RBI is likely to continue with its accommodative monetary policy stance in the upcoming MPC meeting.

“Considering the elevated inflation levels, BWR expects the RBI MPC to adopt a cautious approach and hold the repo rate at 4 per cent,” Rao said.

Rao noted that in the last MPC, RBI initiated measures towards the rationalisation of excess liquidity from the system by announcing a phased hike in the cash reserve ratio (CRR) for restoration to 4 per cent.

“In the current scenario, the RBI may like to drain in excess liquidity, while higher borrowings and the frontloading of 60 per cent borrowings in H1 FY21 may put pressure on yields, and hence, the RBI may go slow in reversing its liquidity measures announced as a Covid-19 stimulus since March 2020,” Rao added.

Meanwhile, G Murlidhar, MD and CEO, Kotak Mahindra Life Insurance Company, said 2021 has seen a rise in yields across the globe in line with the vaccination-led optimism.

“However, the case for India is a little different this time, with a rapid rise in new Covid-19 cases over the last few weeks. In the upcoming policy, MPC may continue to emphasise the importance of ‘orderly evolution of the yield curve’ given benign inflation trajectory and second wave headwinds to nascent growth recovery,” said Murlidhar.

In a bid to control the price rise, the government in 2016 had given a mandate to RBI to keep retail inflation at 4 per cent, with a margin of 2 per cent on either side, for a five-year period ending March 31, 2021.

The central bank mainly factors in the retail inflation based on Consumer Price Index while arriving at its monetary policy. On February 5, after the last MPC meet, the central bank had kept the key interest rate (repo) unchanged citing inflationary concerns.

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MPC meet dates announced – The Hindu BusinessLine

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The Reserve Bank of India (RBI) on Wednesday announced the bi-monthly meeting schedule of the six-member rate-setting monetary policy committee (MPC) for FY2022.

Also read: Jarring signals on economy as inflation is rising, factory output shrinking

Unlike last year, when the first MPC meeting (originally scheduled for March 31, April 1 and 3, 2020) was advanced to March 24, 26 and 27, 2020, and the Governor issued a statement on April 17, 2020 in view of the Covid-19 pandemic, the meeting schedule for FY2022 is spread out evenly.

According to RBI, MPC’s first meeting is scheduled from April 5 to 7, 2021. The subsequent meetings will be held from June 2 to 4, August 4 to 6, October 6 to 8, December 6 to 8, and February 7 to 9, 2022.

Last year, the repo rate (the interest rate at which banks borrow funds from RBI to overcome short-term liquidity mismatches) was cumulatively cut by 115 basis points in two tranches (to 4.40 per cent from 5.15 per cent on March 27, 2020 and to 4 per cent from 4.40 per cent on May 22, 2020), with the accommodative policy stance continuing throughout.

The reverse repo rate (the interest rate banks earn for parking surplus liquidity with RBI) was also cumulatively cut by 65 basis points in two tranches (to 3.75 per cent from 4 per cent on April 17, 2020 and to 3.35 per cent from 3.75 per cent on May 22, 2020).

According to a Barclays report, RBI may maintain its monetary accommodation for a while longer in order to enable the recovery to become entrenched.

Also read: Ten questions for the MPC to consider

The report, ‘Monetary policy: Talking the walk’, observed that recovering output lost to the pandemic could take longer than anticipated, and policy makers will be best served by letting the economy run ‘hot’ for a few quarters.

“The RBI will also need to balance nurturing the recovery and financial stability risks.

“Estimates show that the output gap will be negative well into 2022, and we believe monetary accommodation will be required to support growth recovery,” Rahul Bajoria, Chief India Economist, Barclays Securities (India) Pvt Ltd, and Shreya Sodhani, Research Analyst, Barclays Investment Bank, Singapore.

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MPC expected to retain policy repo rate at 4%: CARE

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The Monetary Policy Committee (MPC) is expected to retain the policy repo rate at 4 per cent owing to the concerns around core inflation, CARE Rating said in a report.

In this regard, the credit rating agency also pointed to the widening fiscal deficit and normalisation of economic activities, which could weigh on the inflation outlook

CARE expects the accommodative monetary policy to continue.

The Reserve Bank of India (RBI) will be announcing the results of voting on the repo rate and monetary policy stance by the six member MPC on February 5, 2021.

The policy repo rate, which is the interest rate at which banks borrow funds from the RBI to overcome short-term liquidity mismatches, has remained unchanged since the last cut in May 2020. There was a cumulative reduction of 115 basis points (bps) during the March to May 2020 period from 5.15 per cent to 4 per cent.

The agency observed that retail inflation, which remained elevated and above the RBI’s flexible inflation target (4 per cent +/- 2 per cent) for 8 consecutive months, registered a perceptible fall in December 2020 to 4.6 per cent, which is at a 15-month low. The decline in retail inflation can be broadly ascribed to fall in food prices and high statistical base effect.

“Core inflation (excludes food and fuel) for December 2020 stood at 5.7 per cent and it has remained range-bound from July 2020 onwards. Elevated core inflation continues to remain a challenge for the RBI’s MPC,” said Sushant Hede, Associate Economist.

CARE expects retail inflation to move towards 5.5 per cent by March 2021. With the Economic Survey and Budget 2021-22 already providing its estimates on the growth outlook for the Indian economy, growth projections from the RBI for the coming fiscal will be closely monitored, it added.

The agency observed that pursuant to the projection of a resilient V-shaped recovery in the Indian economy by the Indian Economy Survey, albeit on a lower size of the economy and the large government market borrowing program announced in the Budget for both the Centre and States, the RBI’s policy action will focus on balancing liquidity in the financial system while keeping inflation within its target band.

 

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Private banks close gap with public sector banks on term deposit rates

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While PSBs’ WALR on outstanding loans fell by 69 bps between February and November 2020, for private banks the rate fell 59 bps. Representative Image

As private banks gain share in the banking system’s deposit base, they have begun to close the gap with public sector banks (PSBs) in terms of how much they pay for deposits. According to Reserve Bank of India (RBI) data on bank group-wise interest rates, the difference between the weighted average domestic term deposit rates of the two sets of banks fell to three basis points (bps) in November 2020 from 32 bps in December 2019. The data also point to poor transmission of rate cuts, with the weighted average lending rate (WALR) on outstanding rupee loans declining only 69 bps between February 2020 and November 2020 even as the repo rate fell 115 bps over the same period.

Private lenders are now comfortable paying less on term deposits even as growth in this category of deposits has been slowing for them in FY21 so far. The central bank’s recent Trend and Progress Report attributed the moderation in term deposits to easing interest rates and the lure of returns on competing asset classes. “Term deposit growth of PVBs decelerated sharply even as it quadrupled in PSBs,” the report said.

Analysts attribute the downtrend in private banks’ deposit rates to a longer-term phenomenon of market share shifts. In a report dated December 16, analysts at Morgan Stanley said that one of the challenges for Indian private banks was that of funding, as they were gaining market share in loans faster than deposits.


Consequently, loan to deposit ratios were high, and private banks were paying a premium on term deposits relative to PSBs. “However, we note that large private banks have significantly accelerated pace of deposit market share gains over the past two years, and hence reduced the premium that they pay on term deposits,” the report said.
Another factor that has helped private banks lower term deposit rates is a faster accretion of low-cost deposits. Credit Suisse said in a recent report that deposit growth in Q2FY21 remained strong for private banks, with smaller private banks continuing to see strong growth post the outflows in Q4FY20, aided by higher rates being offered. “Given excess liquidity, banks have focused on growing their low-cost deposits and CASA (current account savings account) ratios have moved up for most banks,” the report said.

At the same time, private banks have also been slower to pass on rate cuts to their borrowers. While PSBs’ WALR on outstanding loans fell by 69 bps between February and November 2020, for private banks the rate fell 59 bps. Kotak Institutional Equities (KIE) on Monday pointed out that the gap between outstanding and fresh lending rates has been in the range of 110-140 bps for the past nine months. Before that, it had been increasing, led by a steady decline in fresh lending rates.

Obviously, loan spreads remain quite high and a closer look at specific product segments would prove transmission to be less effective than what the headline figure suggests. “In a relatively low growth and heightened risk environment, especially after Covid, we note that the spreads have continued to remain high,” KIE said, adding, “The spread over G-Sec with deposits and loan rates has widened implying banks are seeing lower spreads on investments and better spreads on loan yields.”

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