New Delhi, April 21: In light of a widening interest rate corridor as well as other aggressive monetary easing measures by the Reserve Bank of India (RBI), Fitch Solutions now expects 75 basis points (bps) worth of cuts by March 2021, which imply a repo rate of 3.65 per cent and a reverse repo rate of 3 per cent.
“However, we believe that existing monetary easing measures are still insufficient to lift the economy out of the economic crisis brought about by the COVID-19 outbreak, and softening inflationary pressures will allow for the implementation of more easing measures. At 3.65 per cent, our repo rate forecast is still below market expectations, as suggested by the one-year Interest swap rate of 3.82 per cent as of April 20,” the global rating agency said in its latest report.
According to the RBI, targeted long-term repo operations (TLTRO) 2.0 was implemented as the deployment of TLTRO funds so far has largely been to bonds issued by public sector entities and large corporates, especially in primary issuances.
The disruptions caused by COVID-19 have, however, more severely impacted small and mid-sized corporates, including non-banking financial companies (NBFCs) and micro finance institutions (MFIs), in terms of access to liquidity.
“Without government guarantees on newly issued debt for the banks in the current weak economic environment, credit flow to the economy will continue to struggle. The fact that the initial tranche of INR1.0trn availed to banks through TLTROs announced on March 27 went mostly to relatively ‘lower risk’ securities by public sector entities and large corporates reflects risk aversion on the part of scheduled commercial banks amid an uncertain market backdrop. This is because larger corporates and public sector entities are likely perceived to be more likely to be able to weather out the economic crisis due to being in a better cash flow situation or having government backing versus smaller private counterparts,” stated the report.
The report stated that falling inflation will allow for more monetary easing.
“In line with our expectations, headline inflation eased to 5.9 per cent y-o-y in March from 6.6 per cent y-o-y in February, back within the RBI’s 2-6 per cent target range, due mainly to a softening of food inflation to 7.8 per cent y-o-y from 9.5 per cent y-o-y. We expect a further softening of headline inflation over the coming months due to a further easing of food supply conditions, much lower oil prices versus 2019, and a weakening of core inflation due to a weak demand backdrop,” Fitch Solutions added.