RBI policy: Implementation of reforms key to more rate cuts

India's central bank left interest rates unchanged but cut the cash reserve ratio for banks, saying the primary focus of monetary policy remains fighting inflation, days after the government unveiled a spree of reforms to boost growth and improve its fiscal position.

The Reserve Bank of India left the policy repo rate at 8 percent, in line with expectations in a Reuters poll on Friday before the government unexpectedly announced measures to allow foreign direct investment in industries including supermarkets and airlines.

The RBI cut the cash reserve ratio, the share of deposits banks must keep with the central bank, by 25 basis points to 4.5 percent in a move it said would inject about 170 billion rupees of liquidity into the banking system.

COMMENTARY

ROBERT PRIOR-WANDESFORDE, ASIAN ECONOMIC RESEARCH DIRECTOR, CREDIT SUISSE, SINGAPORE

"I think the Reserve Bank of India's decision not to cut the repo rate is perfectly in line with what they have been suggesting.

 RBI policy: Implementation of reforms key to more rate cuts

AFP

"The recent measures taken by the government are necessary for the economy, but probably not sufficient for a rate cut. And in any case, the last thing the RBI wanted is the measures being withdrawn after it eased rates. Hence a rate cut today looked unlikely.

"We think there is a slightly more than 50 percent chance of a 50 basis point cut in the repo rate in October.

"The cut in cash reserve ratio is a signal of the RBI's dovish intent, and also an acknowledgement of the commercial bank's demand for lower CRR."

RADHIKA RAO, ECONOMIST, FORECAST PTE, SINGAPORE

"By keeping the repo rate unchanged RBI stood by its tough rhetoric on inflation, especially in the light of immediate upside risks to the inflation gauge -- mainly from potential rebound in global commodity prices in wake of U.S. Fed stimulus moves and first/second tier impact from the recent diesel hike.

"There is also a risk that the government's reform agenda could be hindered by implementation delays and rollbacks, especially amid heightened political repercussions. On the CRR cut, we see the move as a possible compromise and a pre-emptive move to boost liquidity (ahead of advance tax payouts)."

JONATHAN CAVENAGH, CURRENCY STRATEGIST, WESTPAC, SINGAPORE

"I suspect the RBI still wants to see inflation pressures move lower before easing policy further. This is also the risk that the recent round of government reforms could come unstuck if opposition in India is strong enough (although this seems unlikely given how weak the growth outlook is at present).

"The CRR cut will add liquidity to the system and is a positive for the growth outlook at the margin. Overall there may be some disappointment after today's RBI announcement but I would still expect any USD/INR bounce to be sold into, particularly after the positive reforms announced around FDI and diesel prices etc. The market has been starved of good domestic news out of India for a long time, hence the positive sentiment in recent sessions can run further in our view."

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI

"The RBI did hold its ground by refraining from a rate cut today keeping in view the persistent inflationary pressures. However, the guidance seems to suggest that with the positive outcomes of the slew of measures announced by the government in the coming months, the RBI is expected to complement with a rate cut.

"We believe that beginning October 30, the RBI is likely to front-load rate cuts and we see 50 basis points cut during October-December."

INDRANIL PAN, CHIEF ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI

"Today's rate decision shows that macro-economy rules over market-economy. It shows that ultimately the fundamentals are determining the Reserve Bank of India's action. This is a great move from the RBI, and re-established the credibility of the RBI as an independent central banker, given that the inflation dynamic looks hazy and on the higher side."

GAJENDRA NAGPAL, CEO, UNICON FINANCIAL INTERMEDIARIES, NEW DELHI

"Given the announcements in the last few days, I did start believing that the RBI will surprise us by cutting the CRR, which is what has happened. RBI is fighting a lone battle against inflation. One can argue that inflation still remains stubbornly high and substantial easing is not possible. I think this is a reasonably prudent move, which will add to liquidity in the system."

SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK CAPITAL, MUMBAI

"The unchanged repo rate is broadly in conformity with the ongoing higher inflationary threats. Though the liquidity situation has improved considerably, the impact of CRR cut is expected to see a downward re-pricing in the lending rates, thus smoothing out the anticipated credit demand in the coming months.

"The long awaited reform announcements though a big feel good, the implementation of the same would hold the key while it comes to a front loading rate cut (repo) decision in the quarter two policy meet. We expect a 50 bps rate cut for FY 13 from here."

Reuters

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Updated Date: Dec 20, 2014 13:00:47 IST