While the credit markets have been very volatile over the last year and continue to be so, July was a bright spot with resolutions beginning in the credit space.

• Jharkhand Road Projects Implementation Company Ltd - an IL&FS SPV company where we have exposure was reclassified from amber to green on singing of the term sheet and funds shall be released on signing of the amendment documents. The NCLAT has also asked the Union of India and IL&FS to finalise conversion of the remaining 10 amber entities to green on similar lines; we have exposure to two such entities – IL&FS Education and Technology Services Ltd and IL&FS Tamil Nadu Power Company Ltd.

• The Essel Promoters have announced a sizeable stake sale in Zee Entertainment Ltd which will provide them with substantial liquidity to reduce their promoter debt. They have also announced that they remain on track to complete their paring down of promoter debt.

The RBI in its latest monetary policy, increased the single counterparty limits exposure for banks to NBFCs from 15% of Tier 1 capital to 20% of Tier 1 Capital. This will help those large NBFCs which were nearing their bank wise ceiling by giving them access to additional funding. Additionally, limits for classification as priority sector lending has been increased for bank lending to agriculture (to Rs 10 Lakh); to MSEs upto Rs 20 lakh and housing upto Rs 20 lakh from existing RS 10 lakh. This will reduce the cost of borrowing to those NBFCs that lend to these sectors giving a filip to those NBFCs.

The RBI further reduced policy repo rate by 35bp to 5.40%, higher than the market expectations of 25bp cut. The tone of the policy statement was dovish with RBI highlighting that growth concerns have now taken centre stage of policy making. However, the RBI reduced its growth forecast marginally to 6.9%, despite various high frequency indicators suggesting weakening of both domestic and external demand conditions and Business Expectation Index suggesting muted expansion in demand conditions.

We believe that RBI may be overestimating growth. In our view, the current run rate of growth is about 5.5%, and despite the favourable base in H2 of FY20 and some help from easier monetary policy, our growth expectation for FY20 is less than 6.5%.

The RBI left its inflation forecast broadly unchanged and we mostly concur with RBI’s inflation forecast, though there is some possibility of upside risk in H2 of FY 20.

The policy statement and our growth-inflation projection indicate space for more rate cuts in the current cycle and further decline in benchmark 10-year yields. This is the second policy of unanimous rate cuts which suggest broad dovish consensus.

Moreover, growth conditions are expected to remain subdued given the ongoing stress in the credit markets, weak equity and residential market conditions impacting risk sentiments, continuing major slowdown in auto sector and further escalation of US-China trade tensions amidst already weakening global growth.

We believe that with government committed to fiscal consolidation, and global outlook remaining clouded, monetary policy will have to do heavy lifting to boost growth. Moreover, persistent low inflation and global trend towards lower rates provide space for more easing, without creating macro risks. The key risks to monitor would be a major global risk-off and capital outflow from EMs given escalating trade tensions, besides the usual risk posed by crude prices.

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