View on RBI Monetary Policy - Aug 2020 - Shanti Ekambaram, Group President - Consumer Banking, Kotak Mahindra Bank

A pause for now and an accommodative stance

The Monetary Policy Committee unanimously decided to keep all key rates - repo, reverse repo, MSF and the bank rate unchanged. This is against the backdrop of rate cuts having been front loaded since February this year, inflation trending above 6% and likely to remain elevated in Q2, ample liquidity in the system and better transmission of rates. This pause also gives the MPC the option of effecting a future rate cut when inflation falls and based on how the economy progresses. . The MPC has also maintained its accommodative stance.

While most countries globally are struggling with growth, liquidity has been ample and there has been buoyancy across markets. Emerging markets, including India, have seen significant inflows which has kept currencies stable.

The RBI Governor reiterated that GDP growth is expected to be negative in Q2 and for the year and inflation is likely to trend much lower in H2 this fiscal. High frequency data shows better traction in June/July and the rural markets are likely to be stable given a normal monsoon.

The much-awaited restructuring scheme for the MSME sector was announced, which will provide additional relief to a sector deeply impacted by COVID-19. Other measures such as increasing the permissible loan to value ratio (LTV) for gold loans to 90 percent till March 31, 2021, will help households facing a cash crunch.

Overall, the policy was on expected lines and in keeping with the current market and business environment.

Source : Equity Bulls

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