What Economists, Bankers And Market Analysts Made Of RBI’s ‘No Surprise’ Policy

Some welcome the rate cut, others hoped for more.
A man drinks tea as he walks past the Reserve Bank of India (RBI) headquarter building in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)  
A man drinks tea as he walks past the Reserve Bank of India (RBI) headquarter building in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)  

The Reserve Bank of India on Wednesday cut the benchmark repo rate by 25 basis points to 6 percent on expected lines, acknowledging the steep fall in consumer price inflation. The central bank, however, maintained its neutral policy stance, leaving economists and market analysts divided over the possibility over future rate cuts.

Four members of the monetary policy committee voted in favour of a 25-basis-point cut, one member voted for a 50 basis point cut and one voted for status quo.

Explaining its decision to cut rates, the central bank said some of the upside risks to inflation have either reduced or not materialised. “Consequently, some space has opened up for monetary policy accommodation, given the dynamics of the output gap,” the RBI’s policy statement said.

The inflation trajectory is, however, expected to rise from its current lows, Patel told BloombergQuint when asked why the central bank chose to keep its policy stance unchanged, leaving the RBI “cautious enough to stick to a neutral stance”.

While majority of the economists and market experts were expecting a 25 basis point cut, some had also hoped for a more aggressive 50 basis point reduction. Here is what they made of RBI’s August bi-monthly policy review.

Finance Ministry Welcomes Rate Cut

The finance ministry welcomed the rate cut saying that it was necessary for sustaining growth.

We welcome the 25-basis-points cut in the repo rate as an important step necessary to converge towards the approporiate real monetary conditions for sustained growth consistent with India’s potential for stable, moderate inflation,
Subash Chandra Garg, Secretary, Department Of Economic Affairs, Ministry of Finance

‘Will Reinforce Confidence’

Welcoming the RBI’s decision, ICICI Bank’s Chanda Kochhar said the move “will reinforce confidence amongst global investors”.

The prudent approach of the central bank in reacting to incoming data in a calibrated manner will reinforce confidence amongst global investors...The formation of a high level committee to address the information asymmetry in the credit markets will help in enhancing transparency and information availability.
Chanda Kochhar, MD and CEO, ICICI Bank

‘RBI Acknowledges Downside Inflation Pressure’

The reduction in repo rate clearly acknowledges the downside pressure to inflation, Yes Bank’s Rana Kapoor said in an emailed statement.

This reinforces my view of room for incremental rate cuts to the tune of 50-75 bps in coming months, which will reinforce RBI’s parallel efforts to address the twin balance sheet problem and support growth recovery.
Rana Kapoor, MD and CEO, Yes Bank

‘Fed Tightening May Give More Room For Another Cut’

The U.S. Federal Reserve, a “critical component” in RBI’s rate decision, is unlikely to raise rates at least till December, offering India’s central bank a “the window of opportunity” for one more cut at the next policy review, according to Rajiv Anand, executive director of Axis Bank.

Anand expects another 25 basis point rate cut in the current year.

I think it should be positive for both equity as well as bond markets, especially in the context of ample liquidity that we are seeing in the system.
Rajiv Anand, ED, Axis Bank

‘Knee-Jerk Reaction’

The rate cut was a knee-jerk reaction to the recent dynamics between growth and inflation, said Rajni Thakur, economist at RBL Bank.

At the current juncture growth inflation dynamics remains muddled with a number of short term disruptions and efficacy of lower rates in kick starting investment cycle is questionable.
Rajni Thakur, Economist, RBL Bank

He added that the transmission of the rate cut would be “less effective at present” as the banking system liquidity is likely to shrink in the second half of the current fiscal.

Banks lower their lending rates more during phases of large excess liquidity situations, rather than as a response to the RBI’s repo rate cuts
Rajni Thakur, Economist, RBL Bank

A rate cut during this period of low inflation is likely to bring down inflation expectations further, he said.

‘Watch Inflation Closely’

The RBI’s decision to cut the repo rate is “appropriate”, according to Soumya Kanti Ghosh of SBI, as any further delay could have been a little late in terms of the overall demand”.

Any rate cut at this point of time will actually aid or spur investments couple of months down the line. So that is a well accepted phenomenon, and from that point of view the rate cut should be largely welcomed by the market.
Soumya Kanti Ghosh, Chief Economic Advisor, SBI

The likelihood of future cuts will depend on the inflation trajectory, he added.

According to SBI, inflation numbers in the coming days will actually start to rise. “Possibly next month, the inflation number could be sub-2 percent but thereafter the inflation will rise, and possibly cross four percent by November 2017,” Ghosh said.

‘Further Cuts Unlikely’

A “very cautious” outlook with no change in stance, along with the 4 percent inflation target would mean that further rate cuts are “unlikely”, said Abheek Barua, chief economist at HDFC Bank. Besides, there could be a slight acceleration in liquidity drainage. This does not bode too well for interest rates going forward, he added.

There could be some rate action in the immediate future, but a lot has already been priced in, he said, adding that the “incremental effect remains to be seen”.

What would be curious, would be to see how things like more clear transmission of policy signals to actual rates is fostered.
Abheek Barua, Chief Economist, HDFC Bank

‘Needed More’

While a 25-basis-point rate cut is welcome, Shishir Baijal, chairman and managing director of Knight Frank India was expecting a “more aggressive rate cut”.

Considering the battery of new reforms in force, a good monsoon in progress, benign inflation numbers, favourable global environment and the overall uptick in industry sentiments, a healthier lending rate could have provided the much needed thrust to fuel India’s growth story.
Shishir Baijal, Chairman and MD, Knight Frank India

He added though, that they were “happy” that the central bank adopted “a monetary policy that propels growth”.

‘Surprised That It Wasn't A Surprise’

The most surprising fact in the monetary policy was that the rate cut was in line with market expectations, said R Sivakumar, head of fixed income securities at Axis Mutual Fund.

That is to say, since October we have had each MPC statement surprising the market. This is the first time market expectations has been realised.
R Sivakumar, Head-Fixed Income, Axis Mutual Fund

Sivakumar added that if the inflation maintains its current trajectory then the RBI may have “another cut available in its arsenal” in the next few months.

Our expectation is that we are very close to the end of the cycle and we expect going forward the market will switch focus away from long bonds in favour of shorter end assets in the short term space below 5 years.
R Sivakumar, Head-Fixed Income, Axis Mutual Fund

‘Prolonged Pause’

Nomura expects a prolonged pause from RBI as it expects both inflation and growth to rise over the next six to 12 months.

Headline inflation bottomed in June and we expect it torise gradually to above the medium-term target of 4 percent on higher food prices andstatistical factors (HRA increases, adverse base effects).
Nomura Report

The central bank’s neutral stance suggests that the RBI’s decision-making remains data dependent, Nomura said in its report.

‘No Hurry’ For Next Rate Cut

Citi does not expect RBI to cut rates in a hurry as the central bank is likely to track the upward move in consumer price inflation over the next few months, it said in a post policy note.

The July CPI could itself be approximately 2 percent and there are quite a few event risks (tomato prices up, onion could be next, HRA increase of state governments, post GST price movements) which could materially affect CPI forecasts.
Citi Report

The foreign brokerage maintains its expectation of another 25-basis-point repo rate cut in the fourth quarter, pending more visibility around meeting the 4 percent CPI target in a sustained manner.

‘Room For One More Cut’

CPI inflation will broadly remain within the RBI’s forecast range for the next few months, Credit Suisse said in its note. While the brokerage does not expect the RBI to cut rates further this year, it did not rule out another 25-basis-point cut later this year.

We expect the RBI to maintain a neutral stance for the rest of the year. In the best case scenario, CPI inflation could remain below 4 percent for March 2018 if GST implementation is deflationary on implementation, and food inflation continues to be moderate. This could open up further space for easing later during the financial year.
Credit Suisse Report

‘Bar For Next Rate Cut Gets Higher’

According to JPMorgan, while further rate cuts by the RBI cannot be ruled out, “after today’s cut, the bar for another cut gets higher”. To that expect, the brokerage expects the central bank to keep rates on hold for the foreseeable future.

Headline CPI would need to be on course to undershooting the RBI’s 4 percent inflation target for the MPC to cut again. Currently, the MPC does not foresee that.
JPMorgan Report


Azman Usmani is a senior correspondent at BQ Prime. He ...more
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