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RBI throws ball back in govt’s court to boost growth: Analysts

The central bank acknowledged that it was concerned about inflation in the near-term.

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Updated: Dec 05, 2019, 04.25 PM IST
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The RBI lowered its GDP growth forecast for the year ending March 2020 to 5% from 6.1%.
The Reserve Bank of India kept its key lending rate on hold in a shock decision on Thursday, despite a worrying slowdown in the country that prompted the central bank to sharply reduce its economic growth forecast to 5% for the year through March, Reuters reported.

The central bank acknowledged that it does have room to cut rates further, but said it was concerned about inflation in the near-term.

"The MPC recognises that there is monetary policy space for future action. However, given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture," the committee said in a statement.

The RBI lowered its GDP growth forecast for the year ending March 2020 to 5% from 6.1%, while raising its headline inflation projection for the second half of the ongoing financial year to between 5.1%-4.9%, from an earlier forecast of 3.5%-3.7%.

Here’s how Dalal Street experts and economists reacted to the money policy decision:

Jimeet Modi, Founder & CEO, SAMCO Securities & StockNote
RBI has finally thrown the ball back in the government’s court to revive the economic engine which has further deteriorated since the last meet. Transmission of interest rates have not happened yet which could be one of the reasons RBI waited to cut rates and nudged the government and banks to take efforts from their end. Additionally, slightly higher inflationary tendencies might have also led to the pause in rate cut. But, this is a negative for the markets as a rate cut was required to boost risk taking appetite in the economy.

Abheek Barua, Chief Economist, HDFC Bank
The pause in the rate cycle comes as a surprise given the dismal growth for the second quarter of 2019-20 and the likely persistence of a slowdown. Clearly the RBI has responded to hardening headline inflation and rising inflation expectations of households. This suggests two things. Any sustained increase in headline CPI inflation (whether or not it is primarily driven by supply shortages that the RBI itself acknowledges as transitory) above the median of the target range of 2 to 6 per cent will make the MPC anxious and translate into a pause. It also seems that the RBI wishes to see the lagged impact of its front-loaded 135 basis point cut in the policy rate along with how some of the fiscal measures play out for future growth. We expect the inflation readings until February to remain above 5%. Moreover, if fiscal policy is expansionary in the upcoming budget and provides some support for growth, the RBI could further be convinced to hold back rate cuts.

Amar Ambani, Head of Research - Institutional Equities, YES Securities
The pause is attributed to transient inflationary risks, though the central bank affirms that there is space for policy action. On inflation, headline CPI in H2FY20 is seen in the range of 5.1-4.7% compared with earlier projection of 3.5-3.7%. However, inflation is seen moderating to 4.0-3.8% in H1FY21. On growth front, the output gap remains negative and RBI concedes that the economy is weakening further. GDP growth projection for FY20 is revised lower to 5%, when compared with the prior estimate of 6.1%. Though several fiscal measures and monetary easing will gradually feed into the real economy, triggering a moderate rebound in the activity during H1FY21. Given the growth-inflation dynamics, we still sense that RBI will deliver a rate cut of 25bps in February policy meeting given the widespread deceleration in the economy. Although RBI is concerned about near-term inflation risks, higher Rabi crop output will assuage the spike in food prices. Benign core-inflation will also persuade RBI to remain accommodative.

Deepthi Mary Mathew, Economist, Geojit Financial Services
It was an unexpected move with RBI keeping the repo rate unchanged at 5.15 per cent, as the market expected 25 bps cut in the repo rate. With RBI following an inflation targeting regime, the central bank focused on maintaining the inflation rate within the target range The rising food inflation posed a challenge to the central bank in cutting the rates. For instance, in October, food inflation stood at 6.93 per cent. In the same month, vegetable prices registered a growth rate of 26 per cent. However, by maintaining the accommodative stance, there is room for rate cuts in the future.

Sudhakar Shanbhag, CIO, Kotak Mahindra Life Insurance
Against an almost consensus market expectation of a rate cut based on the slowdown seen in growth, the MPC seems to have chosen to focus on its mandate of inflation management and have recognised that the latest CPI print and expected prints over the next few months would be higher than their targeted level and also a belief that past rate cuts will help to support growth with focus on transmission.

Vinod Nair, Head of Research, Geojit Financial Services
It is a well-thought unanimous decision of RBI to give ample time for the transmission of five consecutive rate cuts undertaken since January and get better clarity on the inflation trajectory. With slowdown getting more severe than expected and RBI cutting real GDP forecast to 5% from earlier 6.1% for FY20, we can expect more rate cuts depending on the evolving macroeconomic data in the upcoming MPC meetings. We don’t expect this decision to completely change the trend of the market rather than consolidation in rate sensitive stocks in the short-term.

Shishir Baijal, Chairman & Managing Director, Knight Frank India
The industry expectation was that slowing economic growth would take precedence in RBI’s policy decision. Hence, RBI’s decision to not lower interest rate has come as a surprise and a bit of a disappointment to the industry. Lower interest rate would have helped push up credit demand and investment in the economy, aiding overall economic growth. It would have provided much required reprieve to some ailing sectors like real estate and auto. RBI has probably taken the cautious approach of wait and watch to see the effect of past rate cuts and also to assess the inflation trajectory. With economic growth remaining subdued, there are still chances of a rate cut in the next meeting.

Arun Kumar, Head of Research, FundsIndia.com
Today’s status quo on repo rates came as a surprise as consensus was for a 25 bps rate cut. However RBI continues with its accommodative stance given its outlook for moderation in inflation below 4% by H1FY21. The concerns on relatively higher inflation (4.7-5.1%) expected in the near term has led to the pause in rate cuts. While RBI has left space for future rate cuts, better monetary policy transmission, improvement in tight credit conditions and support from fiscal policy will remain the key for sustainable recovery.

Ranjan Chakravarty, Economist, Metropolitan Stock Exchange
This is tantamount to an implicit rate hike - premature and unwarranted, in our opinion, because this is a demand-side reaction to supply-side retail inflation. Growth is left unaddressed. At least the saving grace is that no ammunition was expended on piecemeal measures. We still hope that the growth priority prevails and a substantial easing is brought about in the next policy cycle.

Ravindra Sudhalkar, ED and CEO, Reliance Home Finance
The decision to leave rates unchanged is appropriate. Taking a pause at this juncture, after five consecutive rate cuts is justified. So far, repo rate has been brought down 160 basis points (bps) from August 1, 2018, however, demand continues to remain sluggish. The real estate sector is yet to reap out benefits out of it, which is reeling under liquidity pressures. The banks need to pass on the benefits of the previous cuts to the customers and help boost demand.

Ravikant Bhat, Senior Analyst BFSI, IndiaNivesh
RBI surprised with a unanimous preference for status quo on policy rates, despite observing there was room for a rate cut, due to, as governor stated, slow transmission of earlier rate cuts. The onus clearly shifts to banks, which in our view shall have to hasten transmission on non-repo linked loans.

Kumaresh Ramakrishnan, CIO- Fixed Income, PGIM India Mutual Fund
The status quo on rates appears to have been influenced by a change in inflation dynamics since the October policy. RBI observed that food inflation has spiked sharply to 6.9% in October, a 39-month high and likely to remain so in the coming months. Given the unchanged stance, the risk of a reversal in the direction of rates is low. However, the unexpected halt in the rate cut cycle and lack of clarity on fiscal slippage will push up long end yields. This in turn should favour the short and medium term funds, which invest predominantly in these securities.

Sunil Kumar Sinha, Principal Economist, India Ratings & Research
We believe the evolving growth inflation dynamics provides room for rate cut, the RBI perhaps has been guided by three factors. First, a 25-bp rate cut today would have meant policy repo rate declining to 4.90 thereby leaving very little head room for further monetary action. Second, retail inflation showing rising trend since Feb 2019 and coming in at 4.66% in October 2019, though largely driven by food items. Third allow more time for the transmission of past rate cuts to seep into the economy. Under the current environment when both business and consumer sentiments are down a rate cut alone will not spur consumption and/or investment demand. Therefore, allowing various measures announced by the government as also the policy rate cut of 135 bps during February-October 2019 to play out perhaps is the way forward rather than reducing the headroom available for policy rate cut.
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