No surprise in RBI policy decision, still exists scope for further cuts: Analysts

Mumbai, May 22 () Beyond its timing, there was no surprise in the rate cut move by the RBI on Friday, and there exists a scope for more cuts of up to 1 percentage point because of the troubles on the growth front, analysts said.

However, the decision to extend the moratorium and not go for a restructuring package came for some criticism.

Earlier in the day, RBI's rate setting panel cut key rates by 0.40 per cent for the second consecutive time during the pandemic after pre-poning its scheduled meeting.

Governor Shaktikanta Das said GDP will contract in the fiscal, and the rate cut was directed largely to push up the growth process.

"We expect the terminal repo rate to be cut by 100 basis points in the current cycle even after today's rate cut," house economists at largest lender SBI said, adding an aggressive cut in repo rate is the effective policy response to adjust the real interest rate as inflation is set to "collapse" in FY21.

Such a move will, however, have a "significant sobering impact" on asset quality of banks as RBI research shows, they added.

Bank of Baroda's chief economist Sameer Narang said he expects the GDP to contract by 4.7 per cent in FY21, and headline inflation at 3.5 per cent, which leaves the room for the RBI to deliver another 25 bps reduction in policy rate.

Yes Bank's economists said the RBI will further support the economy with a 0.50 per cent cut in the key rates amidst a widening of negative output gap and assertion of disinflationary pressures.

"All this (the rate cut) was expected and will provide support especially so as the lockdown has been quite severe for the last two months or so impacting activity," analysts at Care Ratings said, hinting that the markets reacted negatively to the move because of the negative growth statement from Das.

Singaporean lender DBS said the reverse repo is likely to become the operative rate from here on as the system is in net surplus liquidity.

However, it was on the regulatory policies front, and the moratorium in particular, that the analysts had some reservations.

SBI note said the market was expecting a clarity on the moratorium, consultancy firm EY made it more explicit.

"It (the announcements) fell short of a one-time restructuring proposition. Instead the moratorium on all term-loans has been extended by three months along with an Funded Interest Term Loan (FITL) plan for loan recoveries from 1 September 2020 to 31 March 2021."

"Given that the economy would take considerable time to recover, a higher EMI (current EMI plus FITL installment) will be difficult to honour. I think a one time restructuring would have enabled a more certain recovery," its partner Abizer Diwanji said.

Domestic rating agency Crisil said Extension of moratorium by another three months will be beneficial from a borrower's perspective, particularly for those whose cashflows have been impacted on account of the extended lockdown and expectation of only a phased resumption of economic activity.

"From a lender's perspective, what needs to be monitored is borrower behaviour pertaining to payment discipline once the moratorium is lifted as 6 months of continuous non-payment of debt obligations can result in some element of credit indiscipline creeping in for certain borrowers," its senior director Krishnan Sitaraman said.

He also said that there will be an increase in non-performing asset levels despite the move to extend the recognition because of the gloomy times that the economy is passing through. AA MKJ MKJ