RBI Monetary Policy: Experts say a rate cut could have been a Diwali gift; status quo on expected lines

The Reserve Bank of India kept its policy rate unchanged at a near seven-year low of 6 percent on Wednesday, despite a sharp slowdown in economic growth after consumer inflation surged to a five-month high. Consequently, the repo rate, at which it lends to banks, will stand unchanged at 6 percent. The reverse repo, the rate at which RBI borrows from banks, was also not tinkered with and remained steady at 5.75 percent, RBI said at the fourth bi-monthly policy review.

Here's what industry chieftains had to say about the policy:

Chanda Kochhar, MD & CEO, ICICI Bank

The RBI’s announcement to keep the policy rates unchanged was on expected lines. The MPC has not viewed the recent growth slowdown as being structural in nature and is expecting it to be transient with growth prospects likely to improve over the medium term. The MPC has also reiterated the need to support investment activity and the gamut of measures that are being undertaken by the government will help this process significantly. By retaining the focus on inflation targets, this policy ensures that the confidence of investors on the Indian macro-economic indicators will continue.  Further, policy action will be contingent on the evolution of the output gap and its impact on the inflation trajectory.

Sanjay Jain, Group Managing Director, Siddha Group

The RBI maintained status quo on key interest rates in the bi-monthly policy announcement. We were anticipating a rate cut which would have helped spur growth in the real estate sector, but RBI's stance on the rise in inflation and economic growth forecast left very little scope for the same. Although the implementation of the recent reforms in the real estate sector such as RERA and GST have brought in the much-needed transparency and has enhanced the ease of doing business, we expect the RBI to cut interest rates in the near future to complement such reforms implemented by the Government.

Kamal Khetan, Chairman & Managing Director, Sunteck Realty

The RBI's decision to keep the key policy rates unchanged is on expected lines, considering its priority is now to support the economic growth. For home loan borrowers, this doesn't bring in any change as the customer would have to wait for the next reset date to get any benefit. Whereas from a developers' perspective, we anticipate most aspiring home buyers to make the purchase decision during the festive season. We welcome RBI's measures to ensure faster rollout of the affordable housing program, close the severe infrastructure gap; restarting stalled investment projects, particularly in the public sector; enhancing ease of doing business, including by further simplification of the GST; and ensuring with time-bound single-window clearances and rationalization of excessively high stamp duties by states.

Representational image. Reuters.

Representational image. Reuters.

Avnish Jain, Head – Fixed Income, Canara Robeco

As expected RBI kept status quo on policy rates while a maintaining “neutral policy” stance. While acknowledging that growth has slowed down, the MPC highlighted risks on CPI inflation arising from global uncertainty, higher crude prices, farm loan waivers and state government’s implementation of seventh pay commission allowances. The MPC noted that while the output gap may have widened, they needed to see more data to separate transient from sustained impact. The MPC expects growth may accelerate in the second half as teething problems from GST abates .

Ashwin Sheth, Chairman & Managing Director, Sheth Corp

Although the policy rate was kept on hold to assess the impact of rising inflation, declining economic growth and the tumbling of rupee against the dollar; a rate cut at this stage would have been an ideal Diwali gift for home buyers who were eagerly waiting for the rates to cut down. The government has already implemented stringent policies like RERA which is increasing the confidence of buyers. In the same vein, RBI too should have looked at the real estate sector with new optimism.

Ranjeet Mudholkar, Vice Chairman and CEO, FPSB India

On account of the RBI keeping rates unchanged the financial consumer's  best bet is to try to take advantage of the expected festive loan offers which the institutions may come up on account of competition among themselves. At the moment the average home loan interest rate is around 8.5 percent with several banks having reduced their MCLR (marginal cost of funds based lending rate), and not many are expected to lower them any further in the immediate future. However, notwithstanding the temptations one should ensure that due adoption of the one-third rule viz. no more than 1/3 of the income should be used for paying the debts, expenses within 1/3 of the Income range, and ensuring that 1/3 of the Income is allocated towards investments.

Surendra Hiranandani, Chairman & MD, House of Hiranandani

Considering the current economic situation, it is disappointing that the RBI has chosen to maintain status quo on policy rates. The downside risks to growth has increased significantly over the last few quarters which coupled with sluggish credit off take has dampened activity across all the sectors. The policy is in line with the Central Bank's stance of achieving the medium term inflation target, but if continuous price pressures are going to limit the room for further rate cuts then the government will have to boost spending that may impact its budget deficit target.

A rate cut now would not only have provided much-needed cushion to the economy, but would have also added thrust to the government initiatives on affordable housing. The real estate industry is already under immense pressure owing to rise in input costs which have put severe strain on profitability. From a consumers perspective, the home loan rates are at their lowest and are unlikely to go down from here immediately. So, they must utilize this opportunity and book their homes ahead of the festive season to cash in on deals offered by developers.

V S Parthasarathy, Group CFO, Group CIO, Mahindra & Mahindra

Good policy is a process and not a state of being. At times, both the direction and destination are important. By maintaining status quo with a 5:1 verdict the MPC has clearly reiterated its wait and watch approach. There are too many moving pieces and it is important from their perspective to exercise caution before proceeding. For India, a higher trajectory of Growth is a must. For this, we need smart and positive cues and from that perspective, this is an opportunity missed. We welcome the ‘pause’ but the positive cue should come sooner rather than later. India has a historic chance to take its growth trajectory higher. The single biggest goal for India is to attain a higher growth rate and on that path, positive cues are very important.


Sanjay Shenoy, Joint Managing Director, Legacy Global Projects

As expected, the policy rate has remained status quo majorly due to an expected spike in retail inflation.  A rate cut would have certainly helped reboot the market as it would ease off the pressure built by GST implementation and demonetisation. Also, the growth in the economy fell to a three-year low of 5.7 percent in the June quarter. While the real estate sector is slowly picking up post the new policy implementation, a cut would have certainly provided an impetus to industry to attract investors and demand, especially during this festive season.

Rajni Thakur, Economist, RBL Bank

In line with our expectations, RBI MPC has decided to keep key policy rates unchanged. Given the rebound in inflationary levels and limited visibility of forward growth momentum, it was a prudent call to stick to ‘neutral monetary stance’ and wait for more clarity on revival in productive activities after the GST disruptions before any rate action. While the Central Bank considers GST impact on growth as transitory, downward revision of  GVA growth projections for 2017-18 to 6.7 percent from the August projection of 7.3 percent  highlights the growth fears that have been impacting business and consumption sentiments in the economy and will likely persist for the rest of the current fiscal as well.”

Bekxy Kuriakose, Head - Fixed Income, Principal Pnb Asset Management Company 

In terms of rate action and stance, the policy was on expected lines. Growth forecast also expectedly has been cut down (GVA growth forecast for FY 18 estimated at 6.7 percent). The RBI has put the ball in the government’s court by pointing out the main reasons for lack of growth and what needs to be done: Recapitalization of PSU banks to revive credit, ease of doing business including simplifying GST norms, kickstarting stalled investment projects and closing the infrastructure gap. We could not agree more. Clearly these are the areas government should focus on.


With six months of the current fiscal behind us, fears of fiscal slippage figure in the policy document with RBI cautioning that fiscal slippage can lead to price pressures. A significant first step has been taken in this policy to address the risk asymmetry in pricing of SDLs of different states where fiscally prudent states do not enjoy much of a premium over fiscally profligate states. Market players have been highlighting this aspect for a long time. To address this, as a beginning RBI would publish High frequency data relating to finances of state governments on its website which can be accessed by investors. Whether the largest buyers of SDLs, PSU banks would access this data and bid accordingly would be a moot point.

Jimeet Modi, CEO, SAMCO Securities 

RBI’s MPC has kept repo rate unchanged but lubricated the economy slightly by reducing the Statutory Liquidity Ratio (SLR) by 50 basis points to 19.5 percent. RBI has missed the opportunity to ignite the economic growth of the country by reducing the cost of money. As per World Trade Organisation (WTO) report, there is significant progress in global trade, especially countries like US and EU have grown faster than expected on the back of low to negative interest rates. If the entire world is progressing with low interest rates, then RBI too could have taken this opportunity to reduce interest rates given that domestic economy has slowed down due to hiccups of GST implementation. GVA grew by 1.2 percent for Q1 - the slowest in decade, Index of Industrial Production (IIP) is slightly inching up, PMI contracting due to lack of orders, lower cement and coal productions, all this ground level indicators point to one thing, that economy needed a booster dose, which the RBI could have given wholeheartedly. The fear of inflationary tendencies due to farm loan waiver or Seventh Pay Commission hikes are far-fetched considering the larger slowdown the economy is facing.

Govind Sankaranarayanan, Chief Operating Officer – Retail Business & Housing Finance, Tata Capital

Post the RBI’s previous policy stance to reduce the repo rate by 25 basis points, retail inflation has seen an increase and reached around 3.36 percent in August, its highest point in the last 3 months. This coupled with recent trends in the global economy – spike in crude oil and the weakening of the rupee has forced the RBI to take a calculated decision to keep the rate unchanged. However, from an NBFC standpoint, the unchanged rate will have a minimal effect on the home loan, auto loan and white goods sector, the demand for which have remained steady and are expected to grow over the next two months as the festive season continues. We are expecting a 25-30 percent increase in personal loan disbursement for the current quarter compared to last year.

Varun Khandelwal, Managing Director, Bullero Capital, Delhi

Chances of a rate cut in the next few months are extremely low. Without getting into value judgments on the sensibility of the MPC’s actions, it is quite clear from their refusal to cut rates despite a dramatic fall in inflation that they really do not want to cut. The impending tightening of monetary policy globally, easing in fiscal discipline, rise in commodity prices are all factors which will reinforce its hawkish stance further. There isn’t much scope for increase in tensions between the government and the RBI. The finance ministry has already had consultations with MPC members and I am certain an exchange of views on ease/don’t ease has transpired. Short of firing the MPC and taking over the RBI, there isn’t really much that the government can do further about interest rates.

Tushar Arora, Senior Economist, HDFC Bank

No surprises as such. Going strictly by the optics of headline inflation is unlikely to result in rate cuts. Room to maneuver will only come if the MPC chooses to utilize the +/-2 percent bandwidth and indeed looks through a marginal rise in inflation above the 4 percent level. I believe this could happen later during the year as growth numbers continue to surprise on the downside.

Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank

I don’t see much of a surprise. RBI has highlighted risks from inflation which were known. Going ahead the room for further action looks very limited. But we do not completely rule out a possible rate cut in upcoming policy, considering factors like growth which isn’t particularly robust as of now. We believe that RBI will stay on status quo for the rest of the year. RBI and government don’t have different objectives, although their means could be different. I don’t see any increased tensions between them.

Sunil Sinha, Director, India Ratings

In my view, another rate cut this fiscal is unlikely unless retail inflation surprises on the downside and inflation levels turn out to be lower than the central bank’s expectations. The government would obviously want the RBI to have a closer look on the economic growth and accordingly reduce the policy rate as the GDP growth rate is dwindling but the central bank’s focus is not only to keep an eye on current inflation levels but to also check inflationary expectations - that is where the conflict between the government and the RBI lies.

Sudhakar P, Head of Research, Williom O'Neil

I definitely feel that pressure from the government is going to mount on RBI to cut rates now, considering many things have not gone well for the government. Economic growth has been really slow. Inflation and global uncertainties are all causes for concern. Somewhere down the line the RBI will consider a rate cut, likely in December.”

Kapil Gupta, Economist, Edelweiss Securities

We are expecting a further rate cut of 25 bps during the rest of the fiscal. The timing of this rate cut will of course depend on various factors including inflation trajectory while the dollar movement and the US Federal Reserve actions will also be critical.

Anita Gandhi, Director, Arihant Capital Markets

In its last policy review in August, the RBI had reduced the repo rate, citing reduction in inflation risks. However, retail inflation rose to a five-month high of 3.36 per cent in August due to costlier vegetables and fruits. Considering that the economy needs immediate measures for revival of growth, at least 2 to 3 rate cuts of 25 bps can be expected going ahead. I do not expect increased tensions between the RBI and the government over policy. Ideally speaking RBI is required to act as an independent entity in the best interest of the nation.

Samrat Dasgupta, CEO, Esquire Capital, Mumbai

I think inflation is inching up a little and with the US also tightening liquidity, the probability for a rate cut, is very low. A maximum of 25 bps is possible, if US says they won’t crunch liquidity anymore. I think government and the central bank is in sync. They know its difficult to cut rate beyond this without harming the rupee.

(With inputs from Reuters)


Published Date: Oct 05, 2017 04:34 pm | Updated Date: Oct 05, 2017 05:44 pm



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