Sponsored by

RBI cuts rate by 25 bps as expected; monsoons and elections cloud the near-term inflation outlook, say analysts

The Reserve Bank of India (RBI) cut its benchmark interest rate by 25 basis points on Thursday, in a widely expected move to boost the economy, while keeping its monetary policy stance “neutral” despite subdued inflation.

Experts weigh in with their views:

B Prasanna, Head – Global Markets group, ICICI Bank
“The MPC decision taken today to cut the repo rate by 25 bps while keeping the stance neutral is a prudent and laudable one. It has successfully managed to keep its stance flexible to react to the need to support growth even as it keeps a close watch on the upside concerns on inflation from rising oil and food prices going ahead. However the sharp downward revisions in the CPI trajectory for FY2020 and expectations of benign inflation till FY2021 as well as the downward revisions in growth forecasts for FY2020 do give the MPC more room to support growth if required. If incoming data on inflation and growth were to further surprise on the downside we could see the MPC cutting rates once more going ahead. It was surprising though that the MPC chose not to be more proactive on liquidity management while still deliberating on the need for keeping liquidity neutral in order to aid transmission. Further dispensations on FALLCR, while not aiding systemic liquidity will surely ease the burden on banks to raise fresh resources to manage LCR requirements. On the developmental front, the proposal to commence the process of implementation of international settlement of Government securities by ICSD is a positive step towards internationalization of our G-Sec market.”

V S Parthasarathy, CFO, Mahindra Group
“With the headwind of synchronized global contraction threatening to hit domestic growth, there was a need for India to get into “Power play” mode to boost its “Run Rate”. By giving a “Doosra” rate cut, the RBI has, amidst all “field restrictions”, provided a window to spur consumption growth. With inflation remaining in the comfort zone, the need of the hour is monetary transmission through durable liquidity.
Going forward the outlook is dependent on how India scores against the “swing” of the monsoon or “spin” of global crude oil prices.The harmonisation of the Liquidity coverage ratio with SLR will release additional liquidity to spur banks’ credit growth. Initiatives on the development of the housing finance securitisation market and market for corporate loans will deepen the secondary market for these assets—a ‘helicopter shot’ for long term stability in the banking sector.”

Joseph Thomas, Head, Research-Emkay Wealth Management

“The RBI has adopted a very sensible and pragmatic approach by cutting the repo rate by 0.25 percent while keeping the policy stance neutral. It takes 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. 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.”

Indranil Pan, chief economist, IDFC First Bank

“I’m happy to see the RBI is not toeing the market line because markets were expecting a much more dovish tone. They have kept inflation balanced even thought their forecast is well contained within the 4 percent trajectory.” We need to watch out how the monsoon pans out. The real issue is when food prices will actually reverse, we’ll have to see if the trigger for that would be a lower monsoon. This is something we must factor in before the MPC moves next. My bet is that the next meet can be a miss from the RBI, unless you see a downside to the inflation trajectory. If inflation continues to rise gradually then the RBI would possibly stay on hold.”

Sujan Hajra, chief economist, Anand Rathi Securities

“While the RBI has highlighted the upside risks to inflation, on account of El-Nino, food prices and fiscal situation, I think the tone is largely dovish. If we see the Congress party’s manifesto, it is a fiscal-expansionary policy, and even for the incumbent government, there is an emphasis to address rural distress, the unemployment situation, so these will have some fiscal implications. Whether the Goods and Services Tax collection will stabilise remains to be seen, but prima facie the fiscal situation will remain a concern irrespective of which government comes to power. If inflation continues to undershoot the 4 percent level, a rate cut of 25 to 50 bps cannot be ruled out in the next 12 months.”

Rajni Thakur, Economist, RBL Bank
“RBI has held on to its gradualist approach in choosing to cut REPO rate by 25 bps and maintaining neutral stance. The two key risk events for inflation trend in the year ahead—monsoons and elections, cloud the near-term inflation outlook and  warrant continued data dependency. The forward guidance for growth and inflation remains mixed and indicate shallow cuts here and there and not a cut cycle for now. At this point, RBI seems to be more focussed on the efficacy of rate cut and its transmission to the end borrowers and we expect to see more action on the liquidity front than rates in the current cycle.”

Khushru Jijina, MD, 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. We look forward to the detailed notes on RBI’s decision to allow Non Deposit taking NBFCs to apply for Authorised Dealer licenses which is expected to expand the forex market.”

Farshid Cooper, Managing Director, Spenta Corporation
“The RBI decreasing the repo rate by 25 basis points is a boon to the sector. This might quicken the pace on both private consumption and private capital expenditure. Furthermore, it is imperative for banks to reduce the lending rates and ensure that the home loan borrowers reap the benefits of this move. The rate reduction will also provide the much-needed stimulus to build upon the various initiatives announced by the Government about reviving the demand in the realty sector in an affordable manner.”

 Shishir Baijal, Chairman & Managing Director, Knight Frank India
“We are delighted with the second consecutive rate cut announced today which ushers an era of falling interest rate regime. We hope that the reduction in rate are passed on by the banks to the home buyers. Lower interest rates, 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.”

Parth Mehta, Managing Director, Paradigm Realty 
“The MPC (Monetary Policy Committee) statement of having a 25bps cut is something the industry was expecting and which was currently needed in order to boost liquidity and investment cycles as few data points like IIP and car sales numbers which came out recently have been timid. One of the major reasons RBI could give a go-ahead to the cut was because the inflation was in check giving them headroom to accommodate cut. This rate cut shall help the borrowing rates related to construction finance getting lowered, as well as the home loan rates easing out bringing back interest levels in property buyers with already lowered GST as buying sentiment booster. We also believe that if the inflation continues to be stable then we can expect another rate cut in the next MPC meeting to revive consumer spending and restore economic growth.”

 RBI cuts rate by 25 bps as expected; monsoons and elections cloud the near-term inflation outlook, say analysts

File image of Shaktikanta Das. PIB

Anuj Puri, Chairman, ANAROCK Property Consultants
“As hoped for, the RBI has reduced the repo rate by another 25 basis points. 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. The repo rate now stands at 6 percent--returning to the same level as in April 2018. This will augur well for the Indian real estate sector and keep the momentum going in the coming year. As it is, the sector already saw an uplift in homebuyer sentiment due to the multiple sops offered by both the Government and the RBI in just the first three months of 2019. These measures have contributed to a 12% increase in housing sales in Q1 2019 across the top 7 cities. The RBI has done its part by slashing the repo rates. 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.”

Rohit Poddar, Joint Secretary, NAREDCO West and Managing Director, Poddar Housing and Development
"The actual inflation has stayed below than projected since February so there was a space for a further cut down in the rates. This is an election year and we can expect transient policies by the authorities due to the ambiguity over the possible policy changes by the newly elected government. This rate cut will affect the buying sentiments in a roundabout way as it is likely to make home loans cheaper. It will be a buoyant Gudi Padwa for the sector."

Amit B. Wadhwani, Co-founder, Sai Estate Consultants
“The second consecutive repo rate cut from the RBI is in lines with the expectations, although markets were expecting a more accommodative stance with 50 bps rate cut.There have been many meaningful interventions by the government and regulator which has provided positive boost to the buying sentiment amongst the home buyers. The real estate residential sector better sentiment growth concurs with improved sentiment in overall business sentiment in the country. Besides OMO, the added focus on currency swap will provide the required easing in the transmitting benefits of the rate cut and also emanating into improving liquidity in the sector. With short term food inflation expected to be benign, the possible seasonal related inflation reversal after monsoon will be a guidance of MPC to go for next rate cut in the month of August.”

Manish Lunia, Co-Founder, FlexiLoans
“The rate cuts by the Central bank will act as a balm to the subdued economic activity components that have a lot of political and macro economic uncertainties to handle in the near to medium term. NBFCs and Fintech lenders who have faced starc rise in cost of funds in the last 9 months will also get some breather with this action and is a welcoming move."

R K Gurumurthy, Head, Treasury, Lakshmi Vilas Bank
“The first MPC meeting for FY 2020 delivered a combination of a 25 basis rate cut and continuance of neutral stance, as expected. That the rate cut was supported by a 4-2 majority, endorses the fact that, the members of MPC have continued with their known stance on macro-economic developments. With output gap remaining negative and domestic economy facing headwinds from global sluggishness, the rate cut was timely and coming as it does on back to back sittings, it should augur well for coming quarters. Real rates are still higher which would leave room for further cuts in either the June or the August policy, once the new government presents the final budget document in July.

“Retail Inflation estimates have been downwardly revised by about 40 basis for each of the half years in FY 2020. Although Met departments have sounded less sanguine on monsoon, the policy appears to be less wary of a likely threat from surging food inflation in summer months. The other important development is lowering GDP growth estimates by about 20-30 basis in H1 FY2020. This assessment should be seen as a fair reflection of the global backdrop and coinciding with a period where the country witnesses General Elections, when currency slippage may be higher. While there is no special reference to liquidity measures, the policy document and the subsequent press conference re-assures that RBI will continue to employ all possible tools available to keep liquidity adequate. Rate cuts are more effective when liquidity is positive – therefore, the operating theme could be to move to a durable positive liquidity which could by itself mark a step towards a more accommodative stance. With further easing by 2 percent for the purposes of LCR, the focus is clearly to support growth from a liquidity standpoint.”

Sapan Gupta, Partner & National Practice Head, Banking and Finance, Shardul Amarchand Mangaldas & Co
“The statement on issue of releasing of fresh circular on stressed asset is welcomed. The revised circular should take inputs from banks and other practitioners. Also, the decision of sending defaulting companies to NCLT should be left to the discretion of banks but can be monitored closely by RBI.”

Sunil Kumar Sinha, Principal Economist, India Ratings and Research (Fitch Group)
“RBI’s rate cut by 25bp in its First Bi-monthly Monetary Policy Statement for 2019-20 is on expected lines. However, as against our expectation of policy stance moving to accommodative, RBI kept it unchanged at neutral despite lowering its CPI inflation forecast downwards to 2.4 percent in Q4:2018-19, 2.9-3 percent% in H1:2019-20 and 3.5-3.8% in H2:2019-20 and FY20 GDP growth forecast to 7.2 percent from 7.4 percent. India Ratings believe this simply means RBI wants to keep its options open with respect to moving the policy rate in either direction should such a situation arises. Despite comfortable inflation and inflationary expectations some of the risks that are looming large on this front are (i) stickiness in the core and core-core inflation (ii) abrupt reversal in vegetable prices especially during the summer month, (iii) uncertainty about the sustainability of the softening of inflation in the fuel group items especially oil where outlook continues to be hazy and (iv) probability of El Niño effects on the monsoon. One additional risk could be the fiscal policy stance of the new government. India Ratings and Research believes with this rate cut RBI perhaps has used up the window available for the rate cut as of now and further rate cut would largely depend on whether the aforesaid risk to inflation materializes or not.”

Motilal Oswal, Chairman & MD, Motilal Oswal Financial Services
“RBI governor cuts 25 BPS as expected by the street, but with the neutral stance. This means that future cuts will be guided by various things in the internal economy and global landscape. We think Nifty can remain nervous and can correct 3-4% to shed away the froth. This near term weakness can be a good opportunity to accumulate for the ‘pre-election results’ rally and beyond that. We believe the spending in the election will be a good lubricant for the economy. This spending will ensure a natural stimulus for the economy and therefore corporate India. At the current Nifty and Sensex levels, a lot of positives are factored in the price and many negatives are unanticipated. Skymet speaking about lower than normal monsoon, ever-changing political barometer, cautious guidance by many corporates ahead of full-year result season, all of these at this juncture does not look to be priced in.”

Ashok Mohanani, Chairman, EKTA World, Vice President, NAREDCO Maharashtra
“The rate-cut and monetary announcement by the RBI has come down to 6 percent for the second consecutive time in 2019 after a surprise rat cut in the month of February 2019. This certainly is an expected move to achieve higher availability of funds and to ensure additional liquidity is infused into the overall sectors. This decision is in consonance with the aim of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent while supporting growth. The movement has boosted the sentiment that has recently proposed budgetary reforms and revised GST rates, will see a further improvement and convert fence-sitters into purchasers. This move is also very beneficial for the potential buyers. A rate cut by RBI will help push up the consumption demand in the country due to a boost in sentiment. We look forward to seeing a sharp rise in sales and demand and a significant drop in unsold inventory by the end of 2019.”

Prabhakar Kudva, Founder Director, Samvitti Capital
“The RBI today cut the repo rate, or the rate at which it lends to banks, by 25 basis points to 6%. This was broadly inline with market expectations. The easing cycle is likely to continue in line with the global central banks and the persistently low inflation. In fact the real rate adjusted for inflation is still quite high in India compared to other countries which should give enough headroom for the Governor to cut rates further. Its important to note that unlike the past the RBI is not dependent on the repo rate alone but is using other instruments like currency swaps and OMOs to inject liquidity into the system which should continue for the private capex and consumption to bounce back.”

KV Srinivasan, CEO, Profectus Capital
“The lowering of repo rates by 25 bps is a welcome step by the RBI. However, since inflation is at a fairly low level, real rates of interest are still high - potential for further easing exists. It is now up to the banks to pass on this reduction to borrowers to bring down funding costs to the SME sector. Perhaps the RBI is worried about fuel prices in retaining a neutral stand, but it is time to kick start capital investment in the manufacturing sector and a benign rate regime is imperative for that.”

Rudra Sensarma, Professor of Economics, IIM Kozhikode
“RBI's repo rate cut was almost a fait accompli with the inflation outlook continuing to be benign for some time and a few leading indicators signalling a growth slowdown. Since last month the RBI had started creating conditions for effective transmission of a rate cut by injecting liquidity in the banking system by way of dollar swaps. Even before that the US Fed's U-turn from hawkish to dovish stance in late January had helped to create scope for a back to back repo rate cut by the RBI. The reduced repo rate will enable the rupee to depreciate and help export sectors and job growth. As for the inflation target, what is often forgotten is that the original notification introducing the inflation targeting regime in 2016 clearly mentioned that the target is to be pursued over the course of the business cycle. It means that inflation need not be maintained at 4% every month but should be within the permissible range allowing the target to be met on an average in the medium to long run. Under governor Das the RBI seems to be returning to this original mandate which allows scope for supporting growth in the short term.”

--With inputs from Reuters

Your guide to the latest election news, analysis, commentary, live updates and schedule for Lok Sabha Elections 2019 on firstpost.com/elections. Follow us on Twitter and Instagram or like our Facebook page for updates from all 543 constituencies for the upcoming general elections.

Updated Date: Apr 04, 2019 15:00:15 IST

Also See