Statement by Mihir Vora, Director & Chief Investment Officer, Max Life Insurance!
The RBI paused. Market expectations were split between ‘cut’ and ‘pause’.
The varying expectations were due to diverse data points since the last policy. On one hand, after a recovery in May-June, the past few weeks have again seen growth flattening. While there was finally good progress in transmission of the previous RBI cuts, the yield curve has steepened which may make further lending rate cuts more difficult. Liquidity remains in significant surplus. Moreover, given asset quality concerns (RBI’s FSR indicated GNPA to rise to 12.5% from 8.5% in base case scenario), expectations were building up for an easing of macro-prudential norms, lower capital requirements, recap of Public Sector Banks and one-time restructuring of loans. On the other hand, supply side disruptions led to elevated inflation (breaching 6% in consecutive months).
Given the above, RBI has judiciously saved the rate cut ammo for later use. RBI also stated negative GDP growth for FY21 and acknowledged higher inflation prints in the near-term. The restructuring dispensation for banks will help ease stress on the capital requirements of the banking system and allow for a more orderly tackling of the COVID-induced stresses. RBI has continued to focus on further bringing down borrowing cost for all.
All-in-all the actions were on expected lines, with no major surprises.