Doors remain open in India for further policy easing in December and likelihood of more into 2020, possibility of which was flagged recently, according to Singapore-based DBS Bank.
Besides the repo rate cuts, more is required to ensure efficient policy transmission in India, such as surplus liquidity conditions, market-driven lending rates and a stable financial system to allow all sectors to benefit from lower borrowing costs, the bank said in commentary on the Reserve Bank of India’s (RBI) October 4 rate cut.
The proposed liquidity management framework has stuck to status quo but, DBS said, it suspects that the current environment will be perceived as one which requires liquidity support because of sticky borrowing costs for non-banks and higher premia for certain credit-deficient segments.
To jump-start transmission through the banking channels, the RBI has mandated banks to peg new floating, personal loans to external benchmarks starting October 1 as against the earlier practice of linking the loans with marginal cost of funds-based lending rates (MCLRs).
Most public sector banks have opted for the RBI’s repo rate as a reference rate, plus a spread fixed by each of them and a mark-up for operational costs, noted DBS.
Finally, financial stability will be a priority. After undergoing a challenging period in the past five years, the country’s banking sector’s non-performing asset ratio has eased to 10.3 percent in March 2019 as against a peak of 11.2 percent, said DBS.
While the worst is likely behind, there are fresh concerns on the horizon, it said.
These are the fallout of further rating downgrades in stressed sectors (real estate, construction and telecom, among others), which will carry ramifications on the banks’ books.
These also include manageable but rising exposure to non-bank institutions while news of balance sheet troubles in non-banks have reverberated through the credit and equity markets.
It pointed out that with non-banks preoccupied with deleveraging and sorting out their asset-liability mismatch, incremental credit growth is likely to slow.
The bank expects refinancing and delinquency risks to surface on a case-by-case basis.
The RBI’s Monetary Policy Committee cut benchmark rates by 25 basis points (bps) on Friday, taking the repo rate to 5.15 per cent.
The cut was as crucial as the forward guidance, both of which reinforced the MPC’s dovish stance, said Radhika Rao, senior vice-president and economist at DBS Bank of Singapore.
The RBI had made the repo rate cut unanimously with one of the members voting for a bigger 40 bps cut.
The central bank had also cut gross domestic product growth forecasts from 6.9 percent to 6.1 percent for 2019-20, based on 5.3 percent assumption in the second quarter of the current fiscal and 6.6-7.2 percent in the second half of 2019-20. First quarter of 2020-21 seen at 7.2 percent. As a forward guidance, the MPC decided to “continue with an accommodative stance as long as necessary to revive growth”, noted DBS.
Proposals of the internal working group on liquidity managements are being assessed, not accepted as yet, according to DBS. Get access to India’s fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code “GETPRO”. Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.