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RBI Policy: Analysts see room for more rate cuts to boost economy

Here’s how Dalal Street experts and economists reacted to the RBI policy outcome.|
Updated: Oct 04, 2019, 08.42 PM IST
The RBI maintained its "accommodative" stance and said it would maintain this position "as long as it is necessary" to revive growth, while ensuring inflation remains within target.
The Reserve Bank of India on Friday cut interest rates for a fifth straight meeting, stepping up efforts to kickstart economic growth languishing at six-year lows, Reuters reported.

The RBI maintained its "accommodative" stance and said it would maintain this position "as long as it is necessary" to revive growth, while ensuring inflation remains within target.

Here’s how Dalal Street experts and economists reacted to the RBI policy outcome:

Motilal Oswal, Managing Director, Motilal Oswal Financial Services
RBI cut policy repo rates by 25 bps to 5.15%. This is a very good level of indicative rates. The issue is, transmission of these rates in the system. RBI has been asking banking system to offer loans at a level that reflects the benchmark cut, but the system is reluctant to pass on, due to risk aversion. It is a dichotomy that one needs money does not get it and the one who is offered does not need it. Equity markets are cautious and watchful about the earnings season which at this juncture looks less enthusiastic. There is a possibility that equity markets will trade cautious and range bound. In medium to long term, I see good investment opportunity in equities.

Nilesh Shah, MD, Kotak AMC
Undoubtedly the revision downward is far more realistic than before the revision, however, the journey from 5.3% to 7% plus in the last quarter of current financial year will not happen unless and until efforts are taken by everyone. Liquidity has turned positive but it has turned positive from July. We need to ensure that transmission happens. There is a lot of blocking of capital which is hurting transmission unless until transmission happens, the liquidity creation will not result into GDP growth. God has been kind with monsoon and oil prices and to that extent, we have to ensure that transmission of credit happens at the borrower level be it corporate or retail and that will create the journey from 5.3% second quarter GDP growth to 7% plus in fourth quarter.

Ashima Goyal, Member, PMEAC
There is a large negative output gap and RBI has room for more rate cuts, but they are on an accommodative stance, so the market can factor in further rate cuts because with inflation below target of 4% and negative output gap, a flexible inflation target has to continue reducing rates. The real rate of 1.35% currently based on the one-year treasury bill and a 4% growth target if inflation is below 4, then the real rate is actually higher and that real rate is too high for severe slowdown that we are undergoing just now because aggregate demand, the real interest rate matters and interest elasticity is quite high and therefore and if they admit that there is a cyclical slowdown, they need to respond since there is not much fiscal space and there is monetary space, they need to use this space.

Dhiraj Relli, MD & CEO, HDFC Securities
RBI cuts rate by 25 bps and maintains stance to “accommodative” as expected. Governor said that they will continue with an accommodative stance as long as it is necessary to revive growth. For FY20 RBI cuts GDP growth forecast to 6.1% from 6.9%, while raises inflation forecast marginally. RBI has also raised lending limit for MFIs. While reducing rate governor added that OMOs will be done to deal with the liquidity situation.

Arun Thukral, MD & CEO, Axis Securities
The measure to raise the lending limit for NBFC-MFI from Rs 1 lakh to Rs 1.25 lakh per eligible borrower will aid financial inclusion and improve the prospects of NBFC-MFIs. RBI since April has cut rates by 110 bps, but the transmission of rate cuts to the end consumer is yet to happen fully. The transmission will greatly help in boosting overall demand and push up the consumption and investment environment in the economy. The overall tone of the policy was very dovish indicating an increased probability of rate cuts in future policy meets if growth in the economy doesn’t pick up.

Jimeet Modi, Founder & CEO, Samco Securities
RBI has reduced interest rate by 0.25%, totalling 1.35% since February 2019, one of the fastest rate cuts in recent history. This is in line with the govt motives to urgently revive growth. Lowering cost of money would certainly budge corporates to take risks and expand driving capex in the economy. As such the MPC was expected to reduce the interest rates given the global fragile environment and slowdown in domestic economy. For stock markets this will be non-event from a short term point of view.

Mihir Vora, Chief Investment Office, Max Life Insurance
With this backdrop, RBI re-iterated that with inflation expected to remain below target, there is policy space to address growth concerns by reinvigorating domestic demand within flexible inflation targeting mandate. RBI’s move to reduce repo rate by 25 bps is a welcome one and will help in lowering cost of capital in the economy. We expect the RBI stance to remain accommodative for the next few quarters. Another 25 bps rate cut in this financial year is likely.

Gopal Balachandran, CFO, ICICI Lombard General Insurance Company
The Monetary Policy Committee has further reduced the repo rate by 25 basis points to 5.15%, thereby maintaining its accommodative stance to revive growth and ensure the inflation remains within the target. It has also revised its FY2020 GDP forecast downwards from 6.9% to 6.1%

Lakshmi Iyer, CIO (Debt) & Head Products, Kotak Mahindra AMC
The RBI MPC voted for 25 bps repo rate cut. It also remained committed to maintaining accommodative stance that aids growth-revival to the extent needed. The tone seems tilted towards a softening bias. With the intent to maintain adequate liquidity in the banking system, bond yields could remain well anchored. This is conducive especially for short-end of the yield curve. Global factors will assume centre stage now, which will determine the near-term movements in yields.

Sameer Kalra, Founder, Target Investing
We believe this repo rate 25bps cut will be transmitted more quickly as a majority of banks have shifted Rs 30-40 lakh loans to repo rate linked products. Loan melas are also been organised that will help provide instant cheaper product though in these melas approvals are not given on the spot. RBI has also mentioned dovish stance as the growth for Sep 2019 quarter to be 5.3% and have downgraded for FY 20. This is negative as they could have been front loading of rate cut to 50bps that would help pickup the finance demand leading to clearing of inventories at automotive and consumer durables sectors and some extent provide some relief to producers.

George Heber Joseph, CEO & CIO, ITI Mutual Fund
There is a possibility of inflation shooting above the RBI forecasts. From debt funds perspective, short to medium end of the yield curve continues to offer better risk-adjusted returns than the long end. This has been our view and we remain with our stance. RBI decided to go for a rate cut for the fifth time in the year in order to revive a sluggish economy. RBI has so far cut the benchmark lending rate by 135 basis points this year. Furthermore, RBI continued to revise GDP projections downward while keeping the stance accommodative

VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services
The big takeaway from the extremely accommodative monetary is that the central bank and the government are in sync on the policy response to revive growth. The MPC’s view that there is further policy space for accommodation to revive growth clearly indicates that more rate cuts are in the offing. Eventually the Repo rate is likely to settle at 4.75 percent in this rate cut cycle. This is good news for the markets even though the markets are concerned about the issues in the NBFC and housing finance space.

Garima Kapoor, Economist And Vice-president, Elara Capital
While lower lending rates are welcome, they alone may not be able to turn around the sentiment in the economy. It would need to be accompanied by spending from the government. The current sluggish growth dynamics and benign outlook on inflation suggest that the MPC would have more room to cut rates.

Kumaresh Ramakrishnan, CIO-Fixed Income, PGIM India MF
The extremely dovish commentary together with the assurance to maintain “adequate liquidity” to aid effective monetary transmission should in our view help short and medium term yields rally over time. This in turn should favour the short and medium term funds which invest predominantly in these securities.

K Joseph Thomas, Head Research, Emkay Wealth Management
The RBI has once again proved to be well ahead of the curve in unleashing monetary efficacies to combat the economic slowdown... with the cut of 25 bps (and) bringing down the repo rate to 5.15%. In conformity with this aggressive approach, the RBI is likely to continue with its campaign for more rapid transmission of the benefits to credit users, through lower rates to a large extent linked to the base rate. There may be further cuts in the rate in light of the GDP growth forecast being lowered form 6.90% to 6.10% for FY20. We need to see more action from the government for a consumption-led recovery.

Sunil Kumar Sinha, Director - Public Finance & Principal Economist, India Ratings & Research
As negative output gap has widened further since the third bi-monthly monetary policy review and inflation is expected to remain below target in the remaining period of 2019-20 and Q1FY21, RBI has decided to continue with an accommodative stance as long as it is necessary to revive growth. We believes window for more rate cuts though may still there, it is dwindling and can accommodate at best another 50 bps subject to inflation remaining within the target.

Surendra Hiranandani, Chairman and Managing Director, House of Hiranandani
With the festive season round the corner, we definitely welcome this move as people make big purchases during Navratras and Diwali. The real estate sector has been looking forward to such initiatives to boost sales as it is highly sensitive to interest rate movements. This further reduction of repo rate will not only bring down the lending rates but also incentivise investment and boost consumption. The government has already announced a series of measures including the steepest cut in corporate tax amongst others to jump-start growth and revive the sagging economy

Anuj Puri, Chairman – ANAROCK Property Consultants
The sector eyes RBI’s monetary policy for cuts in the key lending rates to support the various measures taken by the government to boost consumption sentiment. The repo rate cut of 25 bps to 5.15% announced today is in line with expectations. Considering that the Aug 2019 CPI came in at 3.21% - well below the medium-term target of 4% - RBI had room for such a rate cut. It can probably go some way in improving consumer sentiments ahead of the festive season, which is a crucial quarter for the real estate sales. However, much depends on how efficiently banks transmit the benefits to their homebuying borrowers.

Siddhartha Sanyal, Chief Economist And Head Of Research, Bandhan Bank
The cut was in line with market consensus, and we wouldn't have been surprised if the magnitude of the cut was slightly higher. We continue to see inflation well-anchored. This will offer the central bank more room for easing going ahead. We see rates eventually going to sub-5% by the first half of 2020. We expect some more transmission of rate cuts to borrowers will happen given that the cumulative reduction in repo rate is now 135 basis points during 2019. But that will likely be only a gradual process, given the current weak sentiment and lack of momentum in investments and credit demand from larger corporates in several pockets of the economy.

Shishir Baijal, CMD, Knight Frank India
In light of the ongoing economic distress in the country, the 25 basis points cut in policy rate is short of expectations. While it is the fifth consecutive rate cut this year, it is insufficient to support the flagging consumer demand. The stressed real estate sector was looking up to a strong rate cut and sector specific lending provisions to improve both liquidity scenario and consumer spending ability. As has been witnessed so far, a cumulative 110 bps repo rate cut over the last 6 quarters has failed to stimulate consumer demand as well as private investment in the economy.

Shilan Shah, Senior India Economist, Capital Economics
The official policy stance remains "accommodative", suggesting that further loosening will follow in the near term. We are pencilling in another 25 bps cut in December. The extent of rate cuts should eventually support a pick-up in economic growth. In turn, we think that underlying price pressures will rise and push headline CPI inflation above the 4% target by the middle of next year. Given that interest rates in emerging markets rarely stay on hold for prolonged periods, we think the MPC will opt for modest rate hikes by the end of 2020.

Anagha Deodhar, Economist, ICICI Securities
We are penciling in one more rate cut, albeit of a smaller magnitude (around 15 bps). This takes our terminal repo rate expectation to 5% by the end of FY20. Likely pick-up in growth and inflation in H2 along with the fiscal stimulus provided by corporate tax cuts are likely to limit the room for MPC to cut rates. The upward revision in Q2 inflation confirms that the MPC had underestimated inflation previously.

Ranjan Chakravarty- Product Strategist, Metropolitan Stock Exchange
A 25 bps rate cut disappoints slightly. The market was firming up in anticipation of a significant cut since the morning, as was the rupee. The 25 bps will neither significantly bump up consumption or investment. The MPC needs to be more aggressive to give a proper push to growth. Unfortunately this was another opportunity foregone for now.

Amit Gupta, Co-Founder and CEO TradingBells
Retail investors may feel the benefit this time better than before due to the RBI ruling of external benchmark linked home loan rates, which came into effect from October 1. PSU banks are plying for higher loan disbursements and fund new businesses, which is a positive sign for the economy. This will start yielding positive results once we see actual disbursements happening and businesses are given opportunity with trust and understanding of the business cycle (by the credit rating agencies and the financial institutions). This will lead to amazing growth in the country and we may even outperform other global economies.

Also Read

Debt mutual fund managers react to RBI policy

RBI policy: Why repo rate cut failed to cheer

RBI policy: status-quo for debt mutual fund investors?

Sensex, Nifty fall for 4th day ahead of RBI policy decision

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