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'More rate cuts seen but won't be effective unless credit, economic activity picks up substantially'

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While it is positive sentimentally, the reverse repo rate is the effective policy rate right now, and thus, more effective and relevant than the repo rate. More cuts may come but won't be really effective unless credit and economic activity pick up substantially, Nikhil Gupta, Chief Economist at Motilal Oswal Institutional Equities said in an interview to Moneycontrol's Sunil Shankar Matkar.

Q: What are your thoughts on RBI policy move and was it a need of the hour given the measures announced by RBI?

The cuts in policy rates are a welcome move. We believe that the reduction in reverse repo rate is more effective than the repo rate because the credit off-take and related economic activity are almost negligible right now. Further, the extension of moratorium by another three months is also on expected lines. What caught our attention in this policy was the relief to states amounting to Rs 13,300 crore, which we believe is extremely useful at this stage.

Q: Most experts feel there could be more pressure on banks after six months moratorium. Do you agree, why and how much could be the impact?

Yes. This is unchartered territory and there could be more pressure on banks in H2 FY21. However, not everything will be lost. With the opening up of the economy and resurgence of business activities, banks can also hope to get back their loans. It will be definitely complex and very difficult to estimate anything at this stage.

Q: Experts, as well as corporates, prefer one-time loan restructuring of sectors which are under stress like real estates, hospitality etc. But bankers disagree and they want to wait till the opening of the full economy to get the actual picture. What are your overall thoughts on this topic?

We broadly agree with this. Although the RBI has not announced one-time restructuring so far, it can announce it anytime. And it would definitely make more sense when there is more clarity on the economic recovery. It will, however, need to be seen who will bear the burden of such forbearance.

Q: Do you think deposits and savings rate will decline significantly after the hefty repo rate cut seen since last year? Also, is the rate transmission happening on the ground?

Yes. With a sharp reduction in policy rates, both deposit and lending rates could also come down.

Q: Do you think another repo rate cut is needed as RBI stays accommodative till the sign of revival in the economy?

As we mentioned earlier, while it is positive sentimentally, the reverse repo rate is the effective policy rate right now, and thus, more effective and relevant than the repo rate. More cuts may come but won't be really effective unless credit and economy activity pick up substantially.

Q: Do you think the RBI needs to remove the risk aversion as there is substantial liquidity in the banking sector?

This is more easily said than done. The RBI could help bring back risk appetite by either interfering directly or by forcing banks. Both these measures come with their own set of problems. If RBI buys long-dated G-secs, it is a difficult task to know how much to do, when to stop and more importantly, when to reverse. If banks are forced to buy G-secs, the free market hypothesis is questioned. Therefore, while we all want the RBI to do something, it is not an easy task.

Q: Are these measures from RBI as well as the government enough to revive the economy and what are more measures needed to be taken by both?

It is not easy to revive the economy, which is under lockdown. Even if free money is given to all citizens, that won't revive the economy under lockdown. So, the first thing to track carefully is the re-opening of economic activity and to ensure that there is no second wave of COVID-19 cases. If that's achieved, it will be a meaningful feat in itself to celebrate.

Q: What are your thoughts on inflation and economy growth for FY21 as most of the experts feel it could be negative or flat growth and RBI also said FY21 GDP growth is seen in negative territory. Also, does it mean there would be a strong revival in FY22 considering current conditions?

We expect real GDP to decline 4-5 percent in FY21, with as much as 20 percent fall in Q1 FY21. Since food items account for 40 percent of CPI basket, notwithstanding lower GDP, we expect headline inflation to be around 5 percent this year vis-a-vis 4.8 percent last year. Notably, though core inflation could be only about 2-2.5 percent this year reflecting weak demand.

Q: What is the impact on bonds and yield in short to medium term?

The 10-year bond yield could fall to 5.5 percent over the next few months. We maintain our call.