RBI announcement - from ‘Bazooka’ to ‘Ahimsa-ic’

Posted On Friday, May 22, 2020


In his press conference announcing yet another unscheduled monetary policy announcement, the Governor of the Reserve Bank of India (RBI), Shaktikanta Das, invoked Mahatma Gandhi twice in his speech.

The first time to begin his statement and one more time to end it.

The announcements the RBI had made before, during this lockdown were termed 'bazooka'; suggesting that the measures announced by the RBI had so much fire power to have a significant impact on the financial markets.
Like this one on March 27, 2020 'RBI Announcement: Reason for Cheer?'

Today's, announcement was more 'Ahimsa-ic' in nature.
Fewer announcements were made and the impact on the financial markets are unlikely to be large.

The Repo Rate, the rate at which the banks borrow from the RBI, was cut by 40 bps (0.4%) to 4.0%.
The Repo Rate now is lower than what it was after the global financial crisis of 2008-09.
The Bond market's reaction is muted as ten year government bonds yields were down only 5-10 basis points in response to the 40 basis points cut in policy rates.
Looking ahead, trajectory of bond yields will also depend on how, by how much and when does the RBI support the government's borrowing program and any potential relaxation to HTM (Held to Maturity) limits for banks on their investments in government bonds.

The RBI was clearly alarmed by the recent economic data and the extent of damage that the lockdown imposed due to Covid-19 has caused to the economy.
But in terms of its overall monetary response to this disruption, today's action by the RBI looks benign.

Despite being worried about growth, they continue to remain inflation focused. Thus we see limitations on how much further lower the Repo Rate can decline from here.

The most important statement from the RBI today was the admission that the GDP growth for Fiscal Year 2020-2021 will be negative.
The governor appeared 'somber' than usual and one could sense from his statements that the RBI seems more concerned about the growth situation than the government.

He opened his speech with this quote of Mahatma Gandhi:
"It is when the horizon is the darkest and human reason is beaten down to the ground that faith shines brightest and comes to our rescue."
And added... but "Once again, central banks have to answer the call to the frontline in defence of the economy".

That also explains why 40% of the 'AtmaNirbhar' economic package of INR 20 lakh crore (INR 20 Trillion) was accounted by the RBI alone.

He ended his main part of the speech quoting the Mahatma again:

As the nation prepares for this future, the words of Mahatma Gandhi should inspire us to fight on: "We may stumble and fall, but shall rise again......."
....... Today's trials may be traumatic, but together we shall triumph.

Central banks are typically seen as conservative institutions. Yet when the tides turn and all the chips are down, it is to them that the world turns for support.

That indeed is true. The RBI has done everything and more to try and ensure that the financial markets function properly, market interest rates have moved lower, financial institutions have enough liquidity to grow, that in times of stress your interest cost and hence your EMI burden is lower, due to COVID dislocation you get forbearance on your EMIs.

Where the RBI has struggled and will continue to struggle would be to get banks to lend to those people who are perceived to be risky. That aspect cannot be solved by lower interest rates and easy money. It can only be solved if the risk perception goes and for that the government needs to implement on some of aspects announced in the recent package announced. And do more quickly. It is already too late.

As many of the readers of Quantum Direct will appreciate, this is precisely why at Quantum we have been cautioning investors over the last 2 years.
We have repeatedly said that this crisis in NBFCs and Debt mutual funds will continue and hence investors need to avoid the temptation of trying to earn that extra 1-2% on the fixed income investing.

We have advised to prioritize the safety and liquidity over returns in your debt fund or any fixed income investments including in fixed deposits.

At this juncture we now see a very high level of uncertainty even in the government bond markets and for investors in debt funds it would be prudent to also avoid high market risk. (the risk of change in NAV due to change in market interest rates)

If at all one has appetite to tolerate near term volatility and can remain invested for a longer time frame dynamic bond funds (which do not take too much credit risks) would be a better alternative than long duration funds or gilt funds.

Product Labeling
Name of the SchemeThis product is suitable for investors who are seeking*Riskometer
Quantum Liquid Fund

An Open Ended Liquid Scheme
• Income over the short term

•Investments in debt / money market instruments
Quantum Long Term Equity Fund
Investors understand that their principal will be at Low risk
Quantum Dynamic Bond Fund

An Open Ended Dynamic Debt Scheme Investing Across Duration
• Regular income over short to medium term and capital appreciation

• Investment in Debt / Money Market Instruments / Government Securities
Quantum Long Term Equity Fund
Investors understand that their principal will be at Moderate Risk
*Investors should consult their financial advisors if in doubt about whether the product is suitable for them.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

Mutual fund investments are subject to market risks read all scheme related documents carefully.

Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

Above article is authored by Quantum.

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