Updated: August 7, 2020 10:35:36 am
In a unanimous decision, the monetary policy committee (MPC) of the Reserve Bank of India (RBI) chose to maintain the status quo on interest rates, while retaining its accommodative stance. While growth concerns continue to dominate — the MPC noted that several high frequency indicators had levelled off, suggesting that continued support was needed — its decision, in part, was driven by continuing uncertainty over the trajectory of inflation, doubts over the efficacy of incremental rate cuts at the current juncture with the spread of the virus prompting localised lockdowns, and a desire to keep the powder dry for possible easing down the road. While future policy action will be data driven, the unwillingness of the central bank to provide any estimate of economic growth or inflation underlines the continuing uncertainty.
Alongside the policy announcement, the RBI governor also unveiled a series of regulatory measures aimed at easing the financial stress in the system. It has provided a window under its Prudential Framework to allow lenders to implement a resolution plan. While the details of the loan restructuring will be worked out by a committee headed by K V Kamath, the broad contours of the scheme suggest a rule and time bound framework. Only business affected by the COVID pandemic — accounts not in default for more than 30 days as of March 1, 2020 — will be eligible for restructuring. Moving to such a rules-based framework rather than one based on banks’ discretion should not only help alleviate stress, but also allay concerns to some extent of the misuse of restructuring schemes as in the past. Further, the decision that stressed micro, small and medium enterprises will be eligible for restricting under the existing framework, will also provide much needed relief. However, increasing the loan-to-value ratio for gold loans, while helping ease households cash flows during this financially stressful period, is questionable at a time when gold prices have surged.
In the run-up to the MPC meeting, there was much debate over the extent of the policy space available to the committee to further cut rates, especially with inflation not trending downwards as was expected owing to the destruction in demand. However, the MPC did reiterate the space for further monetary easing. With retail inflation expected to trend lower in the second half of the current financial year, owing to base effects, and fewer supply side disruptions if the spread of the virus is contained, it could open up space for further easing.
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