Thread by @mosesharding

Major take-away from 6th August @RBI Monetary policy review:

(a) Despite being accomodative, effective policy rate is not away from the bottom - can’t push deposit rates down any further

(b) No issue on liquidity infusion, but large reverse flow in R/R counter is worry...1/N

(c) Concerned poor credit growth in banking sector, hence special dispensation for Gold loans increasing LTV from 75% to 90%

(d) Unable to fix a number on FY21 GDP contraction despite seeing downside risks

(e) Mixed outlook on headline CPI inflation, extended rate pause...2/N

(e) Positive from announcement of one-time resolution, providing relief to borrowers and Banks, but not sure at this stage on the extent of relief to both parties

(f) Not providing “free-for-all” kind of resolution on moratorium book is positive, but cost of this is high...3/N

(g) Lot is left open for @FinMinIndia to play decisive role in KV Kamath Committee to make resolution plan effective & viable for most, to limit FY21 GNPA at lower end of outlook 12-15%

(h) Prudent provisioning norms on moratorium book makes it tough for recapitalisation...4/N

Impact on financial markets:

While @RBI has done its best (within limited bandwidth) to ensure (post policy) price stability, but woes around credit delivery, credit risk aversion, rising NPAs against declining PCR, recapitalisation etc still remain valid & getting worse...5/N

Combination of stability in lending rate (not going down any further) and lag time to get banking sector aggressive on credit & non-SLR investment is not good for equities in general and highly leveraged borrowers in particular, while banking stocks not in investment radar...6/N

Given the outlook that best case operating policy rate may not go below 3.10-3.35% in rest of FY21 (from headline inflation outlook at 4-6%), medium/long term Gilt yields would harden despite stability in shorter end, worse when demand-supply dynamics not in favour...7/N

Given the absence of medium term optimism on equities and negative real interest rate (FPIs already in exit mode on Gilts), ₹ would go under pressure notwithstanding lower CAD & hope on accelerated FDI flows, not good for transmission of accommodating policy...8/N

Short term outlook on financial markets:

Pending release of KV Kamath Committee recommendations on resolution on C-19 moratorium, there’s no visibility beyond short term:

#Nifty seen capped at 11200-11350/11500 and firmly supported at 10350/10500-10650

...8/N

#banknifty retain trend down mode from 23150-23500 to 22000-22350 with risk of downside break at 21000-21350 for 19500; need something good from KVK to keep 16000-17500 off radar!

USD/INR stability at 74.50/74.85-75.15/75.50 (of 73.50-76.50) is necessary when chasing FDIs..10/N

10Y bond 5.79% 2030 focus remain at 5.825-5.90% (5.77% 2030 at 5.75-5.825%) and would need Operation Twist & OMOs to limit downside risk beyond 6%. At this point, take this comfort and see worst case at 5.90-6%.

Impact from lockdown & taking behind C-19 remain unknown...11/11