(Reuters) - The Reserve Bank of India (RBI) on Friday slashed its key policy rate for a second time this year in an emergency meeting to counter the economic fallout from an ongoing nationwide lockdown to contain the spread of the coronavirus.
The central bank cut the repo rate by 40 basis points to 4%. The reverse repo rate was also reduced by 40 basis points to 3.35%.
NAVEEN KULKARNI, CHIEF INVESTMENT OFFICER, AXIS SECURITIES, MUMBAI
“The rate cut will have a limited impact in the short term, but is helpful to revive growth over a longer period. However, the decision to extend the moratorium period by another three months is a significant negative for the private banks both in the medium and long term. The impact on the banking sector will be negative.”
“The quantum of cut was largely on expected lines. The RBI also provided its guidance on the direction of growth and expects the GDP to register negative growth in FY21. This is in line with the high-frequency indicators that point to a collapse in demand across the urban and rural economy. The central bank also highlighted that inflation outlook is uncertain given the lockdown-related supply disruptions.”
“The off-cycle cut highlights the acute growth concerns that the RBI governor mentioned in his speech. The nimbleness of the RBI and its willingness to keep all options on the table is welcome. The rate cuts were in line with expectations.
“But the powder needs to be kept dry should the battle turn bloodier. (We are) certainly expecting more cuts of at least 50 bps going forward. The extension of the moratorium was widely anticipated and a response to an extension of the lockdown. Exposure limit increases adds to the flexibility of banks to lend and is a component of a ‘whatever it takes’ stand.”
“We think there is space for further rate cuts in the coming months (25 bps-40 bps). The extension of the moratorium for another three months is a welcome step. The market could be disappointed due to the lack of any specific announcements on open market operations (OMOs) and one-time restructuring of loans.
“The RBI recognised the impact of COVID-19 on GDP growth and expects it to contract in FY21. We expect GDP growth at -2.8% in FY21 and inflation to average at 3.7%.”
“The RBI has delivered along expected lines in the wake of India’s first growth recession in nearly 40 years. However, rising risk perception is holding back monetary transmission. The RBI/public sector may have to step in as lender of last resort, not just for banks, but for all lending institutions.”
RAJAT RAJGARHIA, MD & CEO INSTITUTIONAL EQUITIES, MOTILAL OSWAL FINANCIAL SERVICES, MUMBAI
“The RBI continues to support on the monetary front by doing out-of-turn MPC meets to cut rates. Lowering the cost of capital is some relief in these times. Moratorium extension was expected, considering the economic activity levels.
“India would need more measures on a continuous basis on both fiscal and monetary fronts to revive the economy from the current phase of negative growth.”
“The MPC (Monetary Policy Committee) delivered yet another off-cycle rate-cut, indicating the severity of the crisis and the urgency to deal with it. The important measures it took shows that it expects the aftermath of the crisis to be deep and prolonged.
“Interestingly, the quantum of rate cut was not unanimous this time, indicating that at least one committee member isn’t convinced about the effectiveness of monetary easing for stimulating growth.”
RUPA REGE NITSURE, GROUP CHIEF ECONOMIST, L&T FINANCIAL HOLDINGS, MUMBAI
“There is no doubt that the RBI is doing most of the heavy lifting. However, when growth outlook is highly uncertain, facilitating credit, provision of moratorium and easing of NPA norms are short-term stabilisation measures.
“The RBI will have to think of innovative ways to control the NPA influx and behavioural issues in a post-COVID era. India has not experienced such deep recession earlier, and coping with the help of a fragile financial sector will emerge as the formidable challenge for the RBI.”
JOSEPH THOMAS, HEAD OF RESEARCH, EMKAY WEALTH MANAGEMENT, MUMBAI
“This would help in bringing down the market and lending rates mostly at the short end of the curve. The potential reduction in the cost of funds and the extension of moratorium will be supportive of financial stability, which is of extreme importance as of today.
“We expect rates across the curve to move lower from current levels, though on a risk-adjusted basis, the short- to medium-term would hold better value for long-term investor portfolios.
“In view of large issues at the primary for the rest of the year, from both central and state governments, the likely gains at the long end may come with elevated risks. The fall in the reverse repo rate would serve as a disincentive to banks who hold huge sums of liquidity to look at alternatives including gilts.”
SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI
“The rate cut of 40 bps is in line with expectations as also the extension of loan moratorium. The measure to convert the moratorium interest payment into a term loan payable in course of FY21 is the most important announcement.
“This can reduce NPA, at least in the next 12 months. The additional liquidity measures remain rather muted. The RBI also remains circumspect on growth and inflation outlook.”
“The RBI flagged risks of a negative growth print this year, while holding back on a point target. They expect disinflationary forces to dominate, suggest they open for further reduction in cuts.
“Transmission will be watched closely with shorter tenor rates already well below the repo rate, given the surplus liquidity conditions, with benchmark-linked lending rates expected to correct down along with adjustments in saving rates.
“Moratorium on term loans was not only extended but repayment terms (interest payments) relaxed to prevent a cash-squeeze for borrowers. Relief for the bond markets front was absent and until a formal announcement is made, we expect intermittent securities’ purchase as part of liquidity operations to continue.”
SUVODEEP RAKSHIT, SENIOR ECONOMIST, KOTAK INSTITUTIONAL EQUITIES, MUMBAI
“The RBI’s decision continues to indicate that they remain proactive. With the indication that the growth will be negative, we continue to see space for some further rate cut though the efficacy of rate cuts will progressively be lower.
“The broader markets will focus on liquidity measures such as the path of OMO purchases (preferably a calendar) and regulatory measures to ensure both liquidity and solvency concerns are adequately addressed.”
Reporting by Nivedita Bhattacharjee, Chandini Monnappa, Anuron Kumar Mitra, Chris Thomas in Bengaluru, and Abhirup Roy in Mumbai, Editing by Sherry Jacob-Phillips