Suman Chowdhury, Chief Analytical Officer at Acuité Ratings & Research, on today's RBI announcement

"The decision of the MPC to opt for an interim 40 bps rate cut is primarily driven by an overriding concern on the severe disruption in domestic demand on the back of the Covid-19 lockdown and the resultant risk of an economic contraction in FY21. While inflation continues to remain beyond RBI's comfort levels, this has been led by supply driven factors in food items arising from the lockdown and is expected to moderate over the next few months. Nevertheless, the transmission of the lower rates in the monetary system will depend significantly on the deployment of various monetary tools by RBI including direct or indirect purchase of government securities and also the ability of the banks to cut deposit rates further.

Further, the loan moratorium has been extended by another 6 months given the protracted lockdown which is likely to continue in some parts of the country beyond the month of May. More importantly, the interest accrued on the working capital facilities during the moratorium period is proposed to be converted to a funded interest term loan which is payable by end of FY21. This will provide some relief particularly to the MSME and the corporate borrowers who are likely to witness liquidity challenges for an extended period of time. In our opinion, going forward, there may be a need to provide special dispensation for a more comprehensive restructuring of loans at least in some of the relatively vulnerable sectors."

Source : Equity Bulls

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