RBI‘a Rate Cut Quantum Is In Line With The Expectation Of Market Participants

RBI reduced the repo rate in an inter-policy meeting by 40bps from 4.40 per cent  to 4.00 per cent. Consequently, the reverse repo rate stands adjusted from 3.75 per cent to 3.35 per cent, in line with the market expectation. The Bank rate and Marginal Standing Facility (MSF), stands adjusted at 4.25 per cent from earlier 4.65 per cent. The repo rate is at its lowest while the reverse repo rate at 3.35 per cent is just 10bps above from the historic lows seen during the Global Financial Crisis. The Monetary Policy Committee (MPC) continued with its accommodative policy stance and reiterated that it will maintain the same for as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target.The market expects that there is room for further rate action. 

The moratorium on the term loans instalments has been extended by another three months till August 31, 2020. Similarly, the provision for deferment of interest payment on working capital is extended by another three onths. The RBI also announced a slew of measures to help the economy revive from the COVID-19 impact. RBI extended INR 150 billion line of credit to EXIM bank for a period of 90 days from the date from which it was availed with roll over up to 1 year. This will help traders access longer credit lines and relaxation in remittance norms for traders. The maturity of Rs 1,50,00 crore credit line for SIDBI has been extended further by 90 days. The RBI provided some relaxation to State Governments by allowing them to use their sinking fund with RBI to meet the repayment obligations. It also allowed banks to increase group exposure to connected counterparties to 30% from earlier 25 per cent. However, this is a one-time provision. Asset classification as NPAs norms continued to be relaxed. 

On growth, the RBI expects negative GDP growth in FY21. However, no estimates were given. Expectation of the lockdown to be lifted by end of May makes the RBI believe that demand normalization would take time, which would have a significantimpact on the Q2FY21. Due to the supply chain disruption and social distancing norms, growth is expected to be severely impacted.

On the inflation, RBI noted that the inflation outlook is highly uncertain. RBI also mentioned that there are potentialdisinflationary forces at work like restoration of supply chains, weak demand, normal monsoon, low global crude, metals and industrial prices. These factors are expected to keep headline inflation below target in Q3 and Q4FY21. 

The rate cut quantum is in line with the expectation of market participants, as the yields did not fall by much post the announcement. The market would be expecting guidance from RBI on what would be the action plan for over supply of government bonds and state development bonds. This will be key to the range in which G-Sec would trade.