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MOSL: ECOSCOPE: RBI maintains status quo; Announces various measures to boost liquidity in the economy

ECOSCOPE: RBI maintains status quo;

** In line with expectations, the Reserve Bank of India (RBI) has maintained the policy repo rate at 5.15% in its monetary policy meeting on 6th Feb'20. With this, the reverse repo rate also remains unchanged at 4.9%. The monetary policy committee's (MPC) decision was unanimous in maintaining status quo on both rates and 'accommodative' stance.

** Further, while the RBI has revised up its inflation forecasts for 4QFY20/1HFY21, growth forecasts have been kept unchanged at 5% for FY20. The RBI expects growth at 6% in FY21. As in the last meeting, the MPC has also noted that there remains monetary space for future action, which makes sense considering that the RBI expects headline inflation to ease to 3.2% in 3QFY21.

** While the RBI expects food prices to taper off 4QFY20 onwards, inflation in non-food prices may impart an upward bias on headline inflation. Moreover, volatility in financial markets and crude oil prices are likely to persist.

** The highlights of today's policy were various non-interest rate measures announced by the RBI including durable liquidity of up to INR1t for a longer period of 1-3 years, reducing the cash reserve ratio (CRR) requirements for SCBs on lending to specific sectors and relief to lenders on their exposure to MSMEs and the commercial real-estate sector.

** Overall, how these measures will lead to better transmission in the real economy remains unclear. Since the banking system has been in massive surplus for the past 8 months or so, further boost to supply (or liquidity) is unlikely to revive economic activity. Worrying though is that some lenders may be tempted to fund sub-prime projects or evergreen loans, thus creating further concerns over the medium term. With inflation expected to remain high in CY20, we do not expect any rate cuts during the next 3-4 meetings.