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With inflation above Reserve Bank of India’s upper tolerance band, the central bank may be done with cutting rates, according to a Barclays Securities (India) Pvt Ltd report. However, the likelihood of no further rate cuts does not preclude measures to improve credit, it added.
The report said there may be some space for a resumption of rate cuts in the second half of 2020, if inflation falls below the mid-point of the target range (of +/- 4 per cent).
“With inflation above the RBI’s upper tolerance band, the room for cutting policy rates is shrinking. However, we think a GDP trajectory pointing to slower growth as well as continued concerns about stability in the financial sector will pressure the RBI to continue working to remove obstacles that are impinging the flow of credit in the economy,” said research analysts Rahul Bajoria and Shreya Sodhani.
Referring to the RBI focussing on stimulating credit flow and reducing the cost of capital through unconventional measures, the analysts emphasised that a lack of further rate cuts does not preclude measures to improve credit.
Long-term repo operations (LTROs), regulatory forbearance and Cash Reserve Ratio (CRR) exemptions are among measures taken by the central bank to incentivise lending to productive sectors.
“These unconventional moves are already having a material effect on easing financial conditions, though their end impact on overall credit availability is still unknown. Sovereign yields have fallen materially while corporates are seeing lower borrowing costs, amid falling global yields,” the analysts said.
LTRO may be extended
The report said the RBI may extend the recent LTRO programme following its initial success. This could see the banking sector rely more on wholesale funding than deposits in the near term.
Under LTRO, the RBI is providing one-year and three-year funds at the policy repo rate of 5.15 per cent. This is aimed at improving transmission of changes in the policy rates to banks’ lending rates. Since last month, three LTROs have been conducted, providing banks with durable liquidity aggregating about ₹75,000 crore
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