The RBI’s MPC cut repo rates by 25 bps as expected. Noting however, that the trajectory of inflation in the baseline projection is expected to rise from current lows, the MPC decided to keep the policy stance neutral and to watch incoming data.
On the state of the economy, the MPC was of the view that there is an urgent need to reinvigorate private investment, remove infrastructure bottlenecks and provide a major thrust to the Pradhan Mantri Awas Yojana for housing needs of all. On their part, the Government and the Reserve Bank are working in close coordination to resolve large stressed corporate borrowers and recapitalise public sector banks within the fiscal deficit target. These efforts should help restart credit flows to the productive sectors as demand revives.
Here is what experts decipher from MPC’s decision:
MOTILAL OSWAL, CMD, MOTILAL OSWAL FINANCIAL SERVICES
This was almost a copy book event where street expected 25 bps and RBI Governor delivered 25 bps cut on the policy front.
Non-transmission of past rate cuts, in the economy, is evident and lag in credit takeoff is a function of that. RBI has been facing this challenge of non-transmission for a while, but a silver lining is developing at the macro level where the Forex reserves of India are becoming big. This large Forex reserves eventually will ensure fall in currency premiums and that will result in foreign capital flowing into the economy at substantially lower rates. This will happen as global borrowing rates are subdued and currency risks now tapering off will result in lower rates offered in India.
Markets are overheated but reluctant to fall, a huge pile of cash getting built in the system and waiting to be deployed, that will act as a shock absorber at every weakness. We think long term money should be committed at these levels as well. Barring any global event, the outlook is positive.
DEEPAK JASANI, HEAD RETAIL RESEARCH – HDFC SECURITIES
While the 25 bps repo rate cut was in line with consensus expectations, the neutral policy stance of the MPC may disappoint some market participants.
A 25 bps rate cut by itself will not result in a large fall in interest expenses for the businesses, an indication or hint about the future speed and time of rate cuts could have helped sentiments across the board; though the compulsions of the RBI’s MPC are well appreciated at this point. Availability of credit may be more important than its cost in times when a large section of the business community is undergoing stress. While the markets may react in a knee jerk fashion in the extreme near term, post 24 to 48 hours, it may come back on its original path which seems to be gradually up atleast for the next 2-3 weeks.
As expected the RBI cut repo rate by 25 bp. The central bank has kept the FY 2018 GVA growth rate unchanged at 7.3 %. We understand that the rate cut decision was not consensual. One member wanted a 50 bp cut in rate while another was in favour of a pause, while four members wanted a 25 bp cut. So finally we got 25 bp cut by a vote of 4 to 2.
An important point to note is that the RBI has not changed the policy stance, which continues to be neutral. A shift to ‘accommodative’ stance would have better from the sentiments perspective. To that extend, the decision is disappointing. It is important to note that India has the second highest real interest rate in Asia presently. This is detrimental to credit expansion and economic growth.
The RBI governor expressed concern that CPI inflation might inch up to 4 % by Q4. Perhaps they might cut again when CPI inflation undershoots their estimates, which has been the case in the recent past.
RADHIKA RAO, INDIA ECONOMIST, DBS BANK
The RBI eased policy rates by 25bp, along expectations but the decision was not unanimous Accompanying rhetoric is largely neutral, without giving away particular bias for the rate trajectory. The latter will allow the RBI to be non-committal on the future course of action, retaining the flexibility to react to the evolving inflation trajectory. We reckon that the central bank remains fixated on the inflation outlook, rightly so given its central mandate, rather than being burdened by other considerations, which includes supporting growth and financial stability.
Looking ahead, event risks are aplenty , but the disinflationary pressures in core inflation and ongoing structural corrective steps in food management suggest inflation is likely to stabilize around 4.0% from two to three quarters from now. Today’s policy statement is not a game-changer for the markets, with a neutral central bank to keep interest rate differentials in favour of the economy and thereby fueling foreign investor interests. One needs to differentiate between liquidity management and the rate direction, which might over the course of the coming months move in opposite directions. Whilst rates might be lowered in response to benign inflation, liquidity might continue to be drained to ensure the operating rate target is close to the policy rate.
MUSTAFA NADEEM, CEO, EPIC RESEARCH
We welcome the RBI rate cut in Reverse repo rate by 0.25 bps to 5.75% and repo rate to 6.0% which was widely expected on the D street. RBI also slashed MSF to 6.25% as well. Since there was a level of comfort for RBI due to downward trending inflation, both tradeables and non-tradeables. Projections for inflation is kept at 4% and is expected to be at same level while concern over recent loan waiver by various government is flagged red in near term.
This was mostly discounted in prices where we have seen the recent run up in broader indices as well. Nifty inching from 10k to 10150 and bank nifty actually performed well as it gave a jump from 24500 to 25200.
We have seen positive built up in interest rate sensitive sectors like Automobile, banking, Reality and NBFC. So liquidity was already present for a while and with this boost we may see further momentum. We expect Reality stocks to pick some momentum while Private banks will do well due to their better return on deposits as compared to PSU banks. We maintain our buy on dips strategy with next Targets around 10400 – 10450 while we see fresh base for Nifty at 9950. Bank Nifty may set the tone towards 25800 while base is seen at 24800.
NIKHIL KAMATH, CO-FOUNDER & HEAD OF TRADING, ZERODHA
RBI decision while largely dependent on the three unknowns GST, Demonetisation and Oil, consensus largely forecasted that a rate cut is on the anvil. RBI has cut the repo by 25 basis points which are largely in line with expectations, the markets while factoring in a 25 basis cut were hopeful of a 50 basis point cut as well. This could lead the markets lower intraday as this was totally factored into the price already.
SHASHIDHAR PAI, MD, CITRUS VENTURES
For real estate industry that is going through a major shake-up due to weak demand, tough regulatory changes and ever increasing costs of inputs like steel, cement, tiles etc., a significant reduction in interest rate could have acted as a booster dose. A 25 bps rate cut is like a temporary plaster for a bad wound.
BEKXY KURIAKOSE, HEAD-FIXED INCOME, PRINCIPAL PNB ASSET MANAGEMENT COMPANY
“As was widely expected by market participants, RBI cut key rates (repo and reverse repo) by 25 bps each while maintaining neutral stance. The MPC voted 4-2 in favor of this outcome. While they have acknowledged that some of the upside risks to CPI inflations have not materialized, they continue to remain cautious with eye still on the medium term target of 4% for CPI inflation. Apart from softness in food and fuel prices, RBI also noted interestingly that the Inflation in transport and communication services was depressed by the pricing war in the telecommunication space. Pricing power for industry also remains subdued as per RBI survey.
Among the market development initiatives announced by RBI, it is noteworthy to mention the separate limit in IRFs (Interest Rate Futures) to the extent of Rs. 5000 cr for FPIs. Also RBI plans to review the MCLR and Base Rate mechanism to address the issue of inadequate monetary transmission. Steps are being taken to close out the gap of information asymmetry between borrowers and lenders by having a comprehensive PCR (Public Credit Registry) for which RBI plans to set up a task force.
Outlook: To some extent the rate cut was factored in money market, bond and gilt yields. We expect prices to be supported in the backdrop of ample banking system liquidity and overall benign macro environment. In the near term the ten year benchmark may trade in a range of 6.30 – 6.50%”
RAKESH TARWAY, HEAD RESEARCH, RELIANCE SECURITIES
Reserve Bank of India (RBI) cut REPO rate by 25 bps to 6 per cent in its 3rd Bi-monthly Monetary Policy announcement. Further RBI kept monetary policy stance at neutral and future rate direction will be data driven.
Given the recent trend in food inflation and uptick in global crude price, we expect minimal possibility of any other rate cut in the next monetary policy meeting on 04th Oct 2017. In our view CPI inflation has bottomed out and may see marginal uptick from current level in coming month, thus lowering probability of rate cut.
Further, RBI will continue to work with government to bring down surplus liquidity in the system, which in our view will limit transmission of rate cut taken by the RBI in this policy meet.
SIDDHARTH PUROHIT, SR. EQUITY RESEARCH ANALYST, ANGEL BROKING
“The RBI has gone ahead and cut REPO rate by 25 bps, which was in line with market expectations, accordingly the REPCO rate stands at 6 per cent. With the CPI inflation for June coming down sharply to 1.54 per cent, the market had high expectations that RBI will take steps towards easing rates in the systems. Further the weakening IIP numbers added more to the expectations and accordingly it seems the RBI has acted. With oil prices likely to remain benign aided by a stronger Rupee, should reduce the volatility associated with imported inflation.
The outlook for economic activities in terms of core developed markets like US viz; improved labour conditions and increased consumer spending remains strong. Euro Zone is showing signs of pick up along with some green shoots from Russian, Chinese and Japanese economy. Liquidity remains strong in the system, as the Govt is front loading its budgetary spending. Headline inflation is still expected to be 2-3.5 per cent in 1HFY18 and 3.5-4.5 per cent in 2HFY18 and there are several factors which are contributing to the base line inflation trajectory.
Implementation of farm loan waiver by states may result in fiscal slippages as well as the timing of the state implementation of the 7th CPC. The momentary policy committee noted that the head line inflation excluding HRA impact is around the 4 per cent mark. The GVA forecast for FY17-18 has been kept at 7.3 per cent. Rollout of GST has been smooth, monsoon has been normal and inflation excluding food & fuel has fallen significantly and is expected to remain soft. The MPC is committed to keep headline inflation close to 4 per cent, on a durable basis and has decided to keep the policy stand neutral by watching incoming data.”
JIMEET MODI, CEO, SAMCO SECURITIES
“The rate cut of 0.25 per cent by MPC of RBI was disappointing. On one hand there is an acknowledgment that private sector investments are lacking and on the other hand the solution in the form of 0.25 per cent rate cut do not wholeheartedly address the burning issue of anemic private investments. Because there is lack of incremental private sector investments, job creation is being hampered. The concerns of 7th pay commission and impact of farm loan waivers pales when private capex and employment generation, the larger good are compromised. Globally the world is marching ahead with zero to negative real interest rates, while in India it is one of the highest thereby keeping Rupee at alleviated levels impacting exports. With the blessings from monsoon, there was an opportunity to aggressively cut rates in the interest of accelerated growth for the Indian economy”.
PANKAJ SHARMA, CIO – FIXED INCOME, DSP BLACKROCK MUTUAL FUND
The forward looking communique indicates MPC to be in a data dependent mode MPC expects upside risks for inflation to be contained owing to normal monsoon, food and fuel prices being under check. MPC has leveraged this comfort on inflation to boost private investment and remove infrastructure bottle necks. Risks to inflation have been predominantly assigned to the implementation of pay commission by states in the same form as that of centre.
The MPC policy decision would further strengthen macro stability as we strive to optimise the growth – inflation dynamics; and not leverage one at the cost of other. This augurs well for the domestic financial markets reinforcing the India growth story.
MIHIR VORA, DIRECTOR AND CHIEF INVESTMENT OFFICER, MAX LIFE INSURANCE
Versus the last policy, RBI recognizes that growth, industrial production and private capex are very sluggish, indicating weakness. It thus looks like growth may be a more important concern in future policy decisions. We believe that inflation will be well within the RBI’s comfort zone and in our view, growth in capex will likely remain elusive because of a host of factors. Thus one more rate cut in the next two to three quarters is likely.
CHANDA KOCHHAR, MD AND CEO, ICICI BANK
The prudent approach of the central bank in reacting to incoming data in a calibrated manner will reinforce the confidence amongst global investors. A number of regulatory and developmental measures like tri-party repo for corporate bonds and enhanced limits for foreign investors using the futures market have also been announced. The formation of a high level committee to address the information asymmetry in the credit markets will help in enhancing transparency and information availability.
LAKSHMI IYER, CIO (DEBT) & HEAD – PRODUCTS, KOTAK MUTUAL FUND
The market has largely discounted this action and focus would now shift to global events and how they unfold going forward. The CPI target has been maintained for FY 2018. If CPI continues its softening trend, we believe case for an additional 25 bps remains live before end FY 18. Duration investors are advised to remain invested with the funds. Incremental allocation can be made into credit accrual funds and short term funds.