Since Sanjay Malhotra took office as governor in December, the Reserve Bank of India (RBI) has adopted a more accommodative stance, which bodes well for banking and the economy as they navigate a growth slowdown, according to analysts.
This is evident in the measures it has taken, including a cut of 25 basis points in the policy repo rate, the first in nearly five years; frequent liquidity injections to ease tightness in the system; the postponement of proposed regulatory norms; the withdrawal of cease-and-desist orders on several entities; and the relaxation of risk weightings on banks’ exposure to non-banking financial companies (NBFCs), say analysts.
“Over the past two months, under the aegis of the new RBI governor, we have seen frequent liquidity infusions, open market operations (OMOs) done after several years, a 25 bps rate cut, postponement of implementation of various regulations like expected credit loss (ECL), project finance and liquidity coverage ratio (LCR) and relaxation in risk-weights,” wrote Suresh Ganapathy and Punit Bahlani in a report by Macquarie Research.
Malhotra took over when the Indian economy had reported a seven-quarter-low growth rate of 5.4 per cent in July-September, with increasing clamour from various quarters to cut interest rates.
External factors, such as geopolitical risks, policy uncertainties regarding trade, and their impact on the domestic currency, were a major concern for the central bank.
The RBI’s active intervention in the foreign-exchange market to avoid a sharp decline of the rupee against the dollar weighed on liquidity in banking.
The liquidity deficit had touched Rs 3 trillion in late January — the highest since April 2010.
To ease the situation, the RBI decided to do daily variable rate repo auctions. Additionally, it announced open market operations (OMOs) of government securities and dollar/rupee buy-sell swap auctions.
Meanwhile, to provide a boost to slowing growth, the RBI’s six-member Monetary Policy Committee (MPC) cut the policy rate by 25 basis points in the February meeting — the first MPC meeting since Malhotra took charge — despite the past four headline inflation prints coming above 5 per cent.
According to Malhotra, the MPC felt that a “less restrictive monetary policy” was more appropriate at that juncture.
While experts say the cut may not significantly boost credit growth amid tight liquidity, it remains a step in the right direction.
Meanwhile, while announcing the cut, Malhotra provided much-needed relief to the banking sector by postponing various proposed regulatory measures — norms on the liquidity coverage, ECL, and project finance – that were supposed to kick in on April 1.
Malhotra has extended the deadline for the implementation of liquidity coverage and project finance norms by at least a year because the RBI is striking a balance between benefits and costs of each and every regulation.
Separately, the RBI’s decision last week to relax risk weightings on bank credit to NBFCs from 125 per cent to 100 per cent could inject Rs 40,000 crore into the banking system at an aggregate level, translating into Rs 4 trillion in additional loanable funds.
However, given the tight liquidity situation, policy transmission could take some time.
Sonal Verma and Aurodeep Nandi, in a Nomura report, said: “Policies are moving in the right direction. India is finally taking a more coordinated policy approach — fiscal, monetary, liquidity, macroprudential — to support growth, especially with the aim to boost consumer demand.”
“However, our leading indicators suggest the economy remains in a cyclical downturn, so further policy support will be needed to stabilise growth.
"More easing via liquidity and macro prudential policies to accelerate policy transmission is likely on the cards,” the report said.
Separately, analysts at Emkay Research said: “…reduced risk weights on MFI and NBFC loans, along with repo rate cut and the recent positive overtures on LCR, IRACP (Income Recognition, Asset Classification and Provisioning), and ECL norms under the new governor, should be credit-positive for banks in the medium-to-long term.”
Meanwhile, the RBI, in the past few months, has also worked to remove restrictions on various regulated entities, including Kotak Mahindra Bank, Arohan Financial Services, Asirvad Microfinance, and DMI Finance.
With this, the “cease and desist” order for all banks and NBFCs stands removed, except that for Paytm Payments Bank.
“RBI has initiated several regulatory measures in recent months to support the sector and enhance the operating performance of lenders.
"This includes: a reduction in the repo rate; undertaking of several liquidity-enhancing operations; deferment of LCR, ECL, and project-financing regulations; and the lifting of supervisory restrictions on KMB and many others,” said Motilal Oswal Financial Services in a report.
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