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RBI policy review: 'Pragmatic' move to counter slowing economy

The monetary panel voted 4-2 in favour of 25 bps rate cut.

ETMarkets.com|
Updated: Apr 04, 2019, 05.11 PM IST
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The Reserve Bank of India seal is pictured on a gate outside the RBI headquarters in Mumbai
Bond markets obviously wanted much more. Therefore there has been a small selloff, said Lakshmi Iyer, CIO, Kotak Mutual Fund.
In keeping with popular expectations, RBI's monetary policy committee (MPC) on Thursday lowered the benchmark lending rate by 25 basis points, in a move seen as giving a fillip to the faltering growth.

The policy stance, however, remains unchanged at 'neutral'.

With this, the repurchase or repo rate stands at 6 per cent. Cash reserve ratio (CRR) has been left unchanged at 4 per cent. And reverse repo comes down by 25 bps to 5.75 per cent.

Repo rate is the rate at which the central bank lends money to commercial banks in the event of any shortfall of funds. This is used by monetary authorities to control inflation.

"Short-term outlook on food inflation remains benign... RBI will continue to monitor evolving economic situation and will act accordingly," said Governor Shaktikanta Das in a presser that shortly followed the policy review decision.

The monetary panel voted 4-2 in favour of the 25 bps rate cut.

Let's see what's going on in the minds of analysts and industry hotshots after RBI's first monetary policy review of this financial year.

Abheek Barua, HDFC Bank

Concerns about liquidity measures have been taken care of. This has not been sort of a significant part of the discourse in the media, but banks have been making a very strong case for a leeway on liquidity coverage ratio (LCR) and expansion of Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR). The RBI has been presenting a kinder face to the banks for a while now in its recognition of the need for infusions of durable liquidity. There have been innovations in terms of swaps, open market operations have been there, but what they have done now is just another thing which augments the lending capacity of banks. That is far more important than a 25 bps rate cut in enabling banks to lend at lower rates and making credit available at cheaper rates to encourage borrowing and growth and so forth.

Ashima Goyal, PM-EAC

They are moving slowly and watching the data. So, they have repeated a rate cut. They have taken measures to infuse more liquidity, but for private investment, they could have come with a larger rate cut since the real rates remain very high. Given that they have reduced their inflation forecast, there was room for more cut and since they had started late, the first cut should have come in December, given there was some slowdown in growth and inflation had fallen. They are a little behind the curve in cutting.

Soumya Kanti Ghosh, SBI

We were actually expecting that there could be some change in the stance, but one thing we are very happy that the RBI has given out a message that will actually cool the market. An additional amount of Rs 2,60,000 crore would be released to the banks in terms of the government securities. That means the RBI is actually making the groundwork for liquidity injection if need arises through the open market operations. That is a positive statement. The other thing which I would like to mention there is a task force set up for the development of the secondary market for capital loans. The other big point of the policy is an effective mechanism that could be worked out so that the external benchmark is constant.

Kiran Mazumdar Shaw, Biocon

This is a transient time. Let us wait for the new government to be formed. I am sure the repo rate cuts are in the right direction. Everything does not happen in one fell swoop. Just the trends are important to look at this stage and I think it is a good trend.

Lakshmi Iyer, Kotak Mutual Fund

A rate cut of 25 basis was baked into the prices. No negative surprises per se. A little bit circumspect on growth, given the global headwinds which are lingering, which is pretty much expected. There is benign inflation outlook, less than 2.6 right now, therefore the cut in inflation. Bond markets obviously wanted much more. Therefore, there has been a small selloff so to say, but I do not think one needs to read too much into it because a bulk of it as I said was already baked into the prices. Hope will continue to probably keep the markets anchored. For now, it is largely in line with expectations.

Pronab Sen, Economist

Well, if I were the governor, what I would worry about is not so much what may happen in the next budget, the actual budget that will probably come in July. What I would worry about now is there is a huge amount of currency with the public, which has essentially been saved up for election purposes. This money is going to be spent within the next month and a half and a lot of this is going to come into the banking system. The banking liquidity position is going to change, fairly substantially over the next month and a half. That is what they need to be able to monitor, we worry about fisc once the new government comes to power.

Mythili Bhusnurmath, ET NOW

The central bank has stayed strictly as per what the market expected. There is a clear shift in the RBI’s policy approach... this is the first time that the policy statement clearly says that we need to support growth and though the rate action and the stance may not be very supportive of growth, Shaktikanta Das has shown a kinder face of the RBI to the banks.

Rakesh Mittal, CII

The industry was hoping that we will have a 50 bps cut but eventually it is 0.25. Industry welcomes it. It is a good start. On the growth side, I think, they have taken a realistic picture keeping all the industries in mind but we are hoping that it will beat the growth path.

Naushad Forbes, Forbes Marshall

It is a welcome reduction but I think we still have some way to go before we start seeing a recovery in industrial demand and investment. The Q4 was quite soft. Normally, Q4 is robust and strong regardless of other years has gone so we need to I think serious recovery in industrial investment and industrial demand we are not seeing it yet.

Tanvee Gupta Jain, UBS Investment Bank

Well, I would say till the time we do not see enough policy action in terms of monetary transmission, even though we have seen a 50 bps cumulative rate cuts, the transmission will be delayed and partial because of the wide gap between credit and deposit right now. If you look at the credit-deposit ratio, it is actually near an all-time high.

Shishir Baijal, Knight Frank India

The policy action ushers in an era of falling interest rate regime. We hope that the reduction in rate is passed on by banks to home buyers. Lower interest rates and along with the recent reduction in GST rates for under-construction properties should provide the fillip to end-user demand. The real estate sector has been looking forward to such stimuli to boost sales velocity.

Joseph Thomas, Emkay Wealth Management

The RBI has adopted a very sensible and pragmatic approach. It took cognizance of the likelihood or potential for inflationary pressures emerging from food prices and fuel prices, and also fiscal pressures from the large government borrowing programme. The liquidity management through OMOs, repos and also the occasional currency swaps would help a somewhat better propagation of the impact of rate modifications to the lower levels.

Anuj Puri, ANAROCK Property Consultants

Back-to-back repo rate cuts by the RBI are indeed the perfect start to a new financial year, resulting in overall reduction of 50 basis points since February 2019. This will augur well for the Indian real estate sector and keep the momentum going in the coming year. The RBI has done its part. The onus is now on the banks to concurrently reduce home loan rates further, thereby encouraging more fence-sitters to take purchase decisions and giving another boost to the real estate sector.

V K Vijayakumar, Geojit Financial Services

A key takeaway from the policy is the projection of benign inflation for 2019-20 which has come lower than expectations at 2.9-3 per cent for H1 and 3.5-3.8 per cent for H2. This means that the headline inflation for FY20 is unlikely to go beyond 3.8 per cent anytime... The stance has been maintained at neutral perhaps in the context of the rising crude price and concerns regarding a below normal monsoon.

Sameer Kalra, Target Investing

The votes pattern remained the same showing the continuation of rate policy dependent on the data. Given the volatility in inflation due to oil prices, the MPC has lowered inflation targets by 40 bps, keeping buffer rate cuts if the inflation goes lower. We believe this is a good position as higher cut would have showed weakness at macro level, but such policy decision gives confidence to the stakeholders that there is room for further rate cut, only if needed.

Mihir Vora, Max Life Insurance

A significant portion of market participants were expecting a change in stance from neutral to accommodative, which did not materialise. While the RBI had taken steps to improve systemic liquidity by conducting large open market operations (OMO) and forex swaps in the past few months, a continuation of these measures is important for the bond markets to remain positive. We expect one more rate cut in the current financial year and a shift in stance to accommodative if growth slowdown persists. Oil and other commodity prices and the monsoon rain remain key variables to monitor.

Khushru Jijina, Piramal Capital and Housing Finance

It is necessary to resurrect India’s consumer demand and economic growth before a synchronous downturn in advanced economies heighten market volatility. Today’s rate cut and moderation in liquidity coverage ratio coupled with recent instances of liquidity injections indicate that RBI is cognizant of these risks. These measures would certainly help ease liquidity and improve access to cheaper credit by India Inc as well as retail consumers. The focus to align the Indian housing finance securitisation market as well as the secondary market for corporate loans with international best practices as announced today will essentially deepen these markets and ensure better price discovery.

Amit Gupta, TradingBells

This was the first policy review of the new fiscal, and the final one before the general elections. The markets were expecting a rate cut of 25 bps, and hence we do not expect any short term volatility in the domestic stock markets.

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