SURESH VARGHESE
The Reserve Bank of India (RBI), in its monetary policy committee (MPC) meeting on Thursday, has decided to keep its key lending rates (repo and reverse repo rates) unchanged.
The central bank decided to keep the repo rate at 4% and reverse repo rate at 3.35% mainly on inflation concern.
RBI fears, amid the COVID-19 crisis, the retail inflation in India, especially food inflation, may shoot up in this quarter (July-September period) due to supply disruptions, rural distress and poor economic recovery. Though policy makers paint a rosy picture on Kharif (monsoon) food production, retail inflation is likely to breach RBI’s target of 2% to 6%.
“RBI acted judiciously by keeping the rates unchanged. The surplus liquidity in the banking sector and expectation of inflation rate to remain at the elevated levels in Q2FY21 guided RBI’s decision. One of the major announcements was with regard to raising loan to value ratio (LTV) for gold from 75% to 90%. This would be beneficial to the Indian households in the wake of rising gold prices,” said Deepthi Mary Mathew, economist at Geojit Financial Services.
Though hailed as a deft move to infuse liquidity in the hands of ordinary people, RBI’s decision to raise LTV does not cover the Non-Banking Finance Companies (NBFC), which are playing a major role in the gold loan segment. A leading NBFC in Kerala, when contacted by The Gulf Indians, said they are waiting for clarity on the issue. “Only banks and regional rural banks are allowed to lend up to 90% of the gold value. We are awaiting clarification,” it said. Are they expecting a surge in additional gold loan demand as existing customers can borrow 15% more against their pledged assets? “We are not expecting a higher demand for additional/top-up loans from existing customers as gold is a very precious commodity and people will mortgage it only for the required amount. And they wish to take it back as early as possible,” said the NBFC company.
In the last seven months since February, the MPC has cut the repo rate by 115 basis points (bps). It is the rate at which RBI gives money to the banks. Reverse repo is the rate at which RBI accepts surplus/reserve cash from banks.
RBI Governor Shaktikanta Das also announced decision to extend resolution plan for COVID-affected retail borrowers. He has appointed a committee, headed by eminent banker K.V. Kamat, to suggest ways to implement the scheme. Earlier, moratorium on loan repayments was allowed till this month. Now the moratorium can be extended till December if the loan account is classified as standard and not in default.
“The central bank has preferred to play it safe with a pause even while reiterating that further space is available for more monetary action. The setting up of K.V. Kamat committee to advise on resolutions is an excellent decision,” V.K. Vijayakumar, chief investment strategist, Geojit Financial Services, told The Gulf Indians.
The RBI governor said Rs.5,000 crore will be provided to National Housing Bank (NHB) and it will be for one year, to be charged at the repo rate. A loan resolution plan, which consists of payment moratorium of up to two years for corporate and personal borrowers, will also provide a breather to real estate developers and individuals.
“For the year 2020-21, as a whole, real GDP growth is expected to be negative. An early containment of the Covid-19 pandemic may impart an upside to the outlook. A more protracted spread of the pandemic, deviations from the forecast of a normal monsoon and global financial market volatility are the key downside risks,” the MPC said in its statement.
