Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research, on the RBI policy announcement - Aug 2020

"MPC's decision to hold on to the existing rates appears to stem from its belief that the short term inflation outlook will be uncertain due to supply constraints and cost-push factors. Nevertheless, the MPC statement also highlights its concerns on the ongoing economic contraction in the current year and its intent to track the inflation trend closely so as to ensure timely action as and when appropriate. While the repo rates are almost close to the bottom, we believe there is a possibility of another round of 25-50 bps of a rate cut over the next 6 months. Importantly, RBI has announced steps to address the increased credit concerns arising from the COVID pandemic by constituting an expert committee that will lay down the principles for corporate debt restructuring. This is critical to impart credibility and transparency to any debt resolution that may be undertaken by the banks without any downgrade from the standard asset category. There will be separate windows available for a restructuring of loans of SMEs and individual borrowers who have been impacted by the pandemic. We believe a successful restructuring and resolution programme for COVID impacted loans will go a long way in mitigating credit aversion and facilitating financial stability. RBI has also announced additional liquidity measures over and above those that have already been taken to reduce the asset-liability challenges in the NBFC sector over the last 3-4 months. Although the declining credit spreads are an encouraging indicator of an improving financing environment, the revival in the weak credit growth will remain a big challenge for the central bank."

Source : Equity Bulls

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