Event update RBI's 2nd Monetary Policy 2020-21 - HSBC ...
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Event update
6 August 2020
RBI’s 2nd Monetary Policy - 2020-21
Pause for now but accommodative stance continued
Key Highlights
Our views
Policy rate unchanged; retaining space for monetary policy action
RBI does expect inflation Repo rate at 4.0%; Reverse Repo at 3.35% and Marginal Standing
to trend below the target Facility (MSF) rate at 4.25%
Retains accommodative stance as long as it necessary to revive
of 4% in 2H of FY21 and
growth and mitigate Covid-19 impact, while ensuring inflation remains
being mindful of the within the target
growth challenge has All members of the Monetary Policy Committee (MPC) have voted
maintained unanimously
Additional measures to support credit stress to the weaker sections of
accommodative stance as the economy
long as it requires to – Additional INR 100 bn to NHB and NABARD for further on-
revive growth. lending to smaller HFCs and NBFCs
– A window for Covid-19 related resolution under the current
IBC resolution framework
– Restructuring of MSME debt which have become stressed
due to the pandemic
Summary of the policy measures
Global economy continues to remain fragile since the last policy meet in May
2020, with second wave of infections subduing the early signs of recovery.
Markets however have rebounded since end of March 2020, having some
disconnect from the underlying state of the economies. Emerging market
currencies have appreciated tracking US dollar weakness.
On the domestic front, the path is similar to the global arena with recovery
from lows of April ‘20 and May ’20 being shadowed by risk of fresh infections.
Therefore, high frequency indicators seem to have levelled off. The agriculture
sector is however a bright spot with the healthy progress in monsoon and
buoyed sowing activity pointing to salutary effect on rural demand. Industrial
and services activity however remain in contraction mode, with some pockets
seeing lesser contraction sequentially.
Liquidity in the system is in abundance with net daily absorption moderating
marginally to INR 4.0 lakh crore in July 2020 versus INR 4.1 lakh crore in June
2020. Transmission of rates is improving with weighted average lending rate
on fresh loans coming down by 91 bps during March – June 2020.
Growth Inflation Dynamics – Anaemic growth for full year; base effects
may subdue inflation in 2nd half
Inflation outlook is ridden with uncertainties as supply chain disruptions on
account of COVID-19 persist, with implications for both food and non-food
prices.
A more favourable food inflation outlook may emerge as the bumper rabi harvest eases prices of food grains, albeit in
2nd half of the year. The abatement of price pressure in key vegetables has been delayed and remains contingent
upon normalisation of supplies driving the near term uncertainty. In the non-food category, fuel prices, volatility in
financial markets and rising asset prices pose upside risks. Therefore, expectation is that headline inflation may abate
in the second half only aided by a favourable base effect.
However, in terms of growth, while rural economy is a bright spot, at an aggregate level it is expected to remain
anemic and in negative territory for the full year. The growth risks are tilted towards the downside if there is a
protracted spread in pandemic or deviation in the healthy monsoon progress.
MPC noted that the economy is experiencing unprecedented stress in a difficult global environment and the trajectory
is heavily contingent upon the intensity, spread and duration of the pandemic. In this backdrop supporting the
recovery of the economy assumes primacy but at the same time MPC is also conscious that its primary mandate is to
achieve the medium-term target for CPI inflation of 4 per cent within a band of +/- 2 per cent.
In the balancing of growth inflation dynamics MPC has viewed that there is more clarity required on the variables
impacting inflation and therefore decided that it is prudent to wait and watch the incoming data. It is also in the context
of using the accommodative monetary stance judiciously and opportunistically to maximise the beneficial effects for
reviving the underlying economic activity. The MPC also noted that there remained further space to act, which needs
to be timed appropriately for impact
Accordingly, the MPC decided to stay on hold with regard to the policy rate and remain watchful for a durable
reduction in inflation to use the available space to support the revival of the economy.
Additional Key measures
In addition to the policy action, RBI has also announced additional measures aimed at easing the financial conditions
with measures predominantly aimed to address the existing and potential credit stress.
Additional INR 5000cr to National Housing bank at Repo rate for 1 year to support HFCs
Additional INR 5000cr to NABARD at Repo rate for 1 year to support smaller NBFCs of asset size less than INR
500cr and MFIs
To provide a window under the current resolution framework (Prudential Framework on Resolution of Stressed
Assets dated June 7, 2019) for Covid-19 related stressed assets
– Lenders to implement a resolution plan in respect of eligible corporate exposures without change in
ownership, and personal loans, while classifying such exposures as Standard subject to specified
conditions.
– Applicable for borrowers not in default for more than 30 days as of March 1, 2020.
– Resolution can be invoked any time before 31 December 2020 and implemented within 180 days; lenders
have to keep an additional 10% provision
Restructuring of MSME debt that are standard as of March 1, 2020. Such restructuring can be implemented by
March 31, 2021
Increase loan to value of gold loans from 75% to 90% for non-agricultural purposes
Uniform capital charge of 9% for investment by banks in debt instruments, debt mutual funds and all equity
instruments – Applicable as a general market risk charge
Review of priority sector guidelines (PSL) to include start-ups, solar power, bio-gas and increasing targets for lending
to ‘Small and Marginal Farmers’ and ‘Weaker Sections’
Outlook
Members of the MPC while acknowledging serious concerns on growth are also simultaneously watchful of the
uncertainties around inflation. Also note that this in in the backdrop of a 250 bps rate cut since February 2019 and a
115 bps rate cut since February 2020. The members therefore want to pause and save the ammunition for the
upcoming period, when there is more clarity on the growth – inflation dynamics. RBI does expect inflation to trend
below the target of 4% in 2H of FY21 and being mindful of the growth challenge has maintained accommodative
stance as long as it requires to revive growth.
Going Forward
RBI has delivered a well-balanced policy maintaining its accommodative stance while throwing in a touch of caution
on the inflation front. We expect RBI to remain accommodative towards growth concerns and continue to direct its
actions towards supportive rate actions. These could also come from liquidity measures, twist operations, open market
2
operations etc. In addition to monetary actions, RBI’s continued focus on additional measures directed to ease the
credit stress in the financial system are gratifying.
In the current backdrop of weak fiscal conditions, we would continue to expect RBI to undertake bulk of the heavy
lifting and along with government support to not lift the pedal off the accelerator until the economy begins to revive.
With liquidity as the key driver, we would retain a constructive view on the front-end of yield curve. The longer end
performance is a function of demand-supply and other variables and we would prefer to maintain tactical positions and
therefore continue to maintain the cautious stance on the longer end of yield curve.
Fund positioning
Overnight to Money Market rates (upto 1 year)
HSBC Overnight Fund, HSBC Cash Fund, HSBC Ultra Short Duration Fund and HSBC Low Duration Fund are
focused on different segments of money market curve.
RBI’s accommodative stance and liquidity infusion has led to stable short-term rate. The entire Money-market curve is
centric to the overnight funding cost which is quoting below reverse-repo rate for now. The scenario of stable short-
term rates is likely to continue with visibility of durable liquidity in the system. The Overnight Fund invests only in
overnight asset. With a focus on accrual we intend to keep a neutral duration in the HSBC Cash Fund. The strategy in
the HSBC Ultra Short Duration and HSBC Low Duration Fund is also to maintain neutral duration eying accrual and
roll-down gains viewing stable short-term rate scenario.
Short duration to medium term duration
HSBC Short Duration Fund is expected to benefit from attractive carry at short and medium part of the curve. It offers
significant value for investors at current yields over policy rate in terms of spread. However, the corporate spreads
have come off quite significantly since April post RBI liquidity measures. We do not foresee a meaningful corporate
spread compression in the near term as spreads are already at historical lows. However, the short-medium part of
Government securities curve looks far more attractive than corporate assets of similar maturity. The pick-up over
overnight rate is quite attractive in the short-medium segment on the G-sec curve. With the visibility of stable and
durable liquidity we view the short-medium section of the G-sec curve to outperform. Also as economy starts to open
up gradually, investment recovery might come through corporate supply as scope for government led additional
investment is constrained. As such we intend to maintain an underweight corporate segment while overweight
duration stance vs the index in near term.
Long bonds
In the current backdrop of a very weak fiscal condition, we expect RBI to continue maintaining its accommodative
stance in the upcoming policy with measures aiming at rates and other policy measures supporting, growth, credit
offtake and liquidity. While the current policy action is a pause, we expect further rate cut(s) in the subsequent
policies. While inflation is expected to fall back to below 4% eventually, the interim period along with pandemic related
uncertainties, fiscal overhang might keep the rates range bound albeit with a positive bias as RBI remains
accommodative. Alongside, with liquidity as the key driver, we would retain a constructive view on the rates eyeing the
front and medium part of yield curve as the pocket of opportunity. Longer end of the curve, while not having any major
positive triggers, is currently supported by RBI actions and slowdown in credit offtake for banks.
In the corporate space, the spreads have reduced significantly, and we do not think the spread play to be attractive at
current levels. In addition, supply might resume if these entities will have to undertake the front running in terms of
investment. Therefore, we do not see a further meaningful compression from the current level, though in the near term
it may remain supported on the back of liquidity. We would therefore continue to maintain an underweight stance on
corporate segment and take tactical calls only depending on evolving macro-economic environment.
3Source: RBI policy announcement, HSBC Asset Management, India (HSBC AMC), Data as at 6 August 2020 unless otherwise mentioned
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