Reserve Bank of India (RBI)
Reserve Bank of India (RBI)

Mumbai: The Reserve Bank's rate-setting Monetary Policy Committee (MPC) will meet next week to decide on the policy stance amid the urgency to revive the coronavirus-hit economy and increased demand for one-time loan restructuring by industry chambers.

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

The MPC, headed by RBI Governor, is scheduled to meet for three days beginning August 4 and announce its decision on August 6.

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

It is to be noted here that a fast-changing macroeconomic environment and the deteriorating outlook for growth necessitated "off-cycle meetings" of the MPC - first in March and then again in May 2020.

SBI's research report 'Ecowrap' said with the 115 basis points (bps) reduction in repo beginning February, banks have already transmitted 72 bps to the customers on fresh loans in the interregnum which is perhaps a milestone in terms of the fastest policy rate transmission in India. Large banks have transmitted as much as 85 basis points.

"...we believe an August rate cut is unlikely," it said.

It believes the MPC could now well debate what further unconventional policy measures could be resorted to in the current circumstances to ensure financial stability is continued to be addressed.

However, several experts, including from banks, have opined the RBI may go for yet another reduction in repo rate of at least 25 bps on August 6.

Higher prices of food items especially meat, fish, cereals and pulses pushed the retail inflation based on Consumper Price Index (CPI) to 6.09 per cent in June. The government has tasked the RBI to keep inflation at 4 per cent (+, - 2 per cent). The central bank mainly factors in CPI while arriving at its monetary policy.

Kuntal Sur, Partner & Leader, Finance Risk & Regulation, PwC India, said the MPC has followed an accommodative policy on rates, with a cumulative repo rate cut of 135 bps over the last one year.

"Given the growth priority, we expect the soft stance to continue. However, since there is ample liquidity in the system and transmission of rates is happening, there may be a pause on the reduction of rates," Sur said.

CII Director General Chandrajit Banerjee said in the current subdued economic environment, the RBI must consider regulatory relaxations to avoid a bulge in deficits.

"Banks and financial institutions may be allowed to provide a one-time window for restructuring of all term loans so that companies can come back on stream. The credit guarantee on loans to MSMEs has taken off well," he said.

The RBI may consider increasing the turnover limit for eligible companies in line with the new definition of MSMEs, Banerjee suggested.

Gaurav Dayal, Partner- Lakshmikumaran & Sridharan, agreed with the position taken by SBI Ecowrap that the MPC may look to leave the rates unchanged and not go for further rate cuts in the upcoming meeting.

"However, the committee may yet surprise us by going with a nominal rate cut to lend support to the government's push for reviving growth quickly post the lifting of lockdown," he added.

Mandar Pitale, Head, Treasury, SBM Bank India, said as hinted by one of the MPC members in minutes of the previous meeting, the panel may preserve some space in future when situation starts returning to normalcy and the fiscal and monetary boost measures start generating impacts to ease further to encourage the growth.

"There is still a small probability for a cut in reverse repo rate, acting as signaling rate at present," Pitale added.

Jyoti Prakash Gadia, managing director at Resurgent India, was of the opinion that as per the strategy ahead for the RBI, the policy stance should be accommodative monetary policy for now, implying the government increases the money supply in the economy keeping in consideration to steps to increase slowing Indian real GDP growth rate.

Shanti Ekambaram, Group President, Consumer Banking, Kotak Mahindra Bank, said the interest rate cuts have had little impact on demand stimulation or growth.

The COVID-19 pandemic is hurting both businesses and consumers alike and the uncertainty around when things will normalise has led to lacklustre and muted demand and supply disruptions, she said.

"Having frontloaded the rate cuts and with inflation still above the 6 per cent mark, the MPC may decide to wait and watch and take a pause in August to monitor India's progress in its fight against the virus - both from a health and economic point of view," Ekambaram said.

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