MPC - Dec 4, 2020 - Acuité Ratings & Research

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research, on MPC announced today:

"MPC's decision to keep the interest rates on a pause mode is consistent with the market expectations given the aggressive trajectory of inflation which has continued to rise over the last few months and stood at 7.6% in Oct 2020. While the central bank has indicated its commitment to support growth and will continue to maintain an accommodative stance, we believe that the rate cut cycle is over for all practical purposes. Given RBI's projection of CPI at 6.8% in Q3FY21 and 5.8% in Q4FY21, the expectation of any further rate cut is minimal over the next 2-3 quarters and further, in our opinion, the risks of a reversal in rates have started to increase in a scenario of a stronger growth pickup than the current expectations. RBI's outlook on growth has also clearly been revised given the latest encouraging high frequency data points and there is an expectation of a marginal growth in real GDP in both Q3 and Q4, with the whole year GDP projection revised downwards to (-7.5%). While RBI has managed the bond yields well in the face of challenges on the inflationary, fiscal and the currency front so far, the task is going to be increasingly challenging over the next few months in our opinion.

One of the steps to encourage lending from the banking sector has been to permit the banks to use the TLTRO route to fund the additional exposures to the stressed corporate and the SME borrowers under the ECGLS scheme. RBI has also made some important announcements to strengthen the framework for financial stability. NBFCs and UCBs are expected to witness a tighter supervisory environment with guidelines on risk based internal audit to be put in place. Further, restrictions on dividend payouts for NBFCs and banks also reflect RBI's intent to conserve capital in the financial sector. The other relevant aspect is the focus on strengthening the IT security mechanisms in the banking system given the exponential rise in digital platforms including internet and mobile banking."

Source : Equity Bulls

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