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RBI’s MPC meets next week in urgency to revive growth

Experts are divided, however, over the possibility of another rate cut by the RBI in its upcoming policy, arguing that one-off loan restructuring was more essential at this point to overcome the COVID-19 situation.

The MPC, led by the governor of the RBI, is due to meet for three days beginning Aug.4 and announce its decision on Aug.6.

The central bank has taken proactive steps to limit the damage to the economy caused by the COVID-19 pandemic and subsequent lockdowns.

It should be noted here that a rapidly changing macroeconomic environment and the deteriorating growth outlook necessitated “off-cycle meetings” of the MPC first in March and then again in May 2020.

According to the SBI research report, “ Ecowrap ”, with the reduction of 115 basis points (bps) of the repo in early February, banks have already passed 72 bps to clients on new loans in the interregnum, which is perhaps a milestone in terms of the fastest key rate transmission in India. The big banks passed on up to 85 basis points.

“… we think an August rate cut is unlikely,” he said.

He believes that the MPC could now discuss what other unconventional policy measures could be used in the current circumstances to ensure that financial stability continues to be addressed.

However, several experts, including banks, estimated that the RBI could opt for a further cut in the repo rate of at least 25bp on August 6.

Rising food prices, especially meat, fish, grains and pulses, pushed retail inflation based on the Consumer Price Index (CPI) to 6.09 percent in June . The government instructed the RBI to keep inflation at 4 percent (, – 2 percent). The central bank mainly takes the CPI into account while arriving at its monetary policy.

Kuntal Sur, Partner & Leader, Finance Risk & Regulation, PwC India, said the MPC has followed an accommodative rate policy, with a cumulative reduction in repo rates of 135 basis points over the past year.

“Given the growth priority, we expect the soft position to continue. However, since there is sufficient liquidity in the system and the rate transmission occurs, there may be a pause on rate cuts, ”Sur said.

CII chief executive Chandrajit Banerjee said in the currently moderate economic climate, the RBI must consider regulatory easing to avoid increasing deficits.

“Banks and financial institutions may be allowed to provide a one-time window for the restructuring of all term loans so that businesses can return to service. Credit guarantee on loans to MSMEs has taken off well,” he said. -he declares.

The RBI could consider increasing the turnover limit for qualifying companies under the new definition of MSMEs, Banerjee suggested.

Gaurav Dayal, partner-Lakshmikumaran & Sridharan, endorsed the position taken by SBI Ecowrap that the MPC may seek to leave rates unchanged and not opt ​​for further rate cuts at the next meeting.

“However, the committee can still surprise us by opting for a cut in nominal rates to support the government’s desire to revive growth soon after the lockdown is lifted,” he added.

Mandar Pitale, Director of Treasury, SBM Bank India, said, as one of the MPC members suggested in the minutes of the previous meeting, that the expert group could save some space. in the future when the situation returns to normal and fiscal and monetary stimulus measures begin to generate the impacts to be further mitigated to encourage growth.

“There is still a low probability for a drop in the reverse repo rate, acting as the signaling rate at this time,” added Pitale.

Jyoti Prakash Gadia, Managing Director of Resurgent India, was of the opinion that according to the upcoming strategy for the RBI, the policy stance should be an accommodative monetary policy for the time being, which implies that the government increases the money supply. in the economy taking into account the steps increase the slowdown in the Indian real GDP growth rate.

Shanti Ekambaram, group chairman, Consumer Banking Services, Kotak Mahindra Bank, said interest rate cuts had had little impact on stimulating demand or growth.

The COVID-19 pandemic is hurting businesses and consumers, and the uncertainty around when things will normalize has led to dull and muffled supply and demand disruptions, she said.

“After loading the rate cuts and with inflation still above the 6 percent mark, the MPC may decide to wait and watch and take a break in August to monitor India’s progress in its fight against the virus from both a health and economic point of view, ”Ekambaram said.

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