RBI holds rates steady; seeks to balance growth and inflation risks, say analysts

The Reserve Bank of India (RBI) held rates steady on Thursday and retained an accommodative policy stance as it sought to support faltering growth and avoid stoking already high inflation levels.

The central bank has its work cut out as the economy is forecast to grow 5% in the year ending in March, its weakest pace in 11 years. A rapidly-spreading coronavirus outbreak in China has also heightened concerns around the world of a damaging blow to global growth.

All six members of the MPC voted to keep rates steady and retain the accommodative monetary policy stance.

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Experts weighed in with their comments:

Joseph Thomas, Head-Research, Emkay Wealth Management, Mumbai

In the recent policy pronouncements, the RBI had very clearly indicated that the requirements of growth should get precedence over stability, against the conditions of sluggish economic growth and the fall in consumption and investment demand.It was widely expected that the RBI was likely to continue with the pause till there is greater visibility on the inflation front. At this juncture, rate modification is not required as the interbank market has a huge surplus of close 3 trillion rupees ($42.08 billion) to support the liquidity requirements of the system, and this alone will ensure that the short-term rates do not move up.”

Rajni Thakur, Economist, RBL Bank

The MPC in its interest rate decision stayed on expected lines in keeping policy rates on hold and maintaining its accommodative stance. The changes in development and regulatory policies, however, were a positive surprise and could potentially turn out to be a big support to the troubled sectors in the economy. While the specific announcements in terms of CRR relief or long term durable liquidity for banks push the overall credit availability in the financial system, whether these steps manage to improve demand conditions is another question altogether. Overall, however, RBI’s continued focus on easing credit flow in the economy will help the sentiments. Growth inflation outlook remains uncertain for now and hence the forward rate actions will stay data-dependent.

Garima Kapoor, Economist-Institutional Equities, Elara Capital, Mumbai

The recent high prints of CPI inflation have altered the RBI’s rate-cutting trajectory. While CPI inflation will cool off from the recent highs as vegetable prices ease, we are unlikely to see inflation cooling below 6 percent until June 2020. We continue to expect the MPC to stay on hold through CY2020. Given the still subdued growth outlook and elevated trajectory for CPI inflation till mid-2020, we believe any room for a rate cut may only emerge towards Q4FY20. There isn’t any impact from the coronavirus outbreak in India as yet. But it needs to be watched very closely, especially since the pace at which it is spreading is swift. The disruption of global supply chains and its ramifications for India need to be watched closely.

Shubhada Rao, Chief Economist, Yes Bank, Mumbai

(The RBI’s rate decision is) in line with expectations. It is likely to maintain a status quo in the near term. With an inflation forecast of 3.2 percent factored in for Q3 FY21, in conjunction with our forecast, we expect RBI rate action in October 2020 monetary policy. (We) expect 25 bps rate cut then.

A file photo of Shaktikanta Das, RBI governor. Pic courtesy: Twitter

Rupa Rege Nitsure, Group Chief Economist, L&T Financial Holdings, Mumbai

Today’s monetary policy response is the most optimum in the current circumstances. By keeping the stance at accommodative, by granting CRR exemption against the loans given to the stressed sectors and extending a one-time restructuring for MSMEs, etc, the policy has strengthened the stimulus package announced by the Union Budget.

Rohit Poddar, Managing Director, Poddar Housing and Development Ltd. and Joint Secretary, NAREDCO Maharashtra

The RBI maintaining a status quo with an ‘accommodative’ stance with adequate policy space availability is positive news for the overall economy. The real estate sector was expecting some stimulus after a subdued Budget. The policy rates have remained unchanged for the second time after consecutive reductions of 135 bps in 2019. The cash reserve ratio leeway for new consumer loans is expected to facilitate the transmission of monetary policy. The RBI has extended the timeline of the commencement for commercial operations for project loans, which is a big relief for the commercial segment of the real estate sector. With the output gap moving to negative and liquidity remaining surplus in Dec'19 and Jan'20, impact the realization of fresh credit for developers and reduced home loan rates will complement the initiative to increase the borrowing ratio to GDP. These measures will further help in propelling the consumption-led economy.

Amit Gupta, Co-Founder & CEO, TradingBells

The RBI keeps interest rate unchanged with an accommodative stance which was largely expected but the benefit of CRR to banks for the Auto, Home and MSME loans is a big positive for the overall market as liquidity was the main concern for economic growth. There is a big booster for the real estate sector in terms of extension of date of commencement of commercial operations of project loans for commercial real estate, delayed for reasons beyond the control of promoters, by another one year without downgrading the asset classification. So we can say that this monetary policy is an extension of the budget to boost economic growth. The market is taking this policy on a very positive note where Nifty has taken out its crucial supply zone of 12100-12135. If it manages to sustain above this zone then it may head towards 12,300-mark and even lifetime high can't be ruled out in the coming days while in the downside 12,000-11,950 zone has become a strong base.

Amar Ambani, Senior President and Head of Research-Institutional Equities, YES Securities

Along expected lines, MPC unanimously decided to maintain status quo on the policy rate but remain accommodative, as long as necessary, to revive growth. Reduced CRR requirement for incremental retail loans was a positive step. With inflation expected to remain elevated in the coming months, we see a long pause on Repo rates. However, we expect the RBI to continue to act with other monetary tools like OMOs and Operation Twist. The RBI and the government will likely take steps to improve the transmission of rates in the economy. We see headline inflation coming off significantly in H2 FY21, with favorable base effect kicking in and fuel and food prices decelerating. RBI will be in a position to cut rates again after a long pause, in our opinion. We’re yet to work out the extent of cuts, but a 25 basis point should come through at the very least.

Rahul Grover-CEO, SECCPL

Considering that much of earlier rate cuts hasn't resulted in credit into the system, it wasn't necessary for another round of cuts particularly when inflation seems to be on the uptick. Manufacturing figures are encouraging which would have prompted a rethink at the MPC and may have resulted in this decision. We at Sai expect tangible credit in the system. Banks are still unwilling to lend and measures to instill confidence needs to be made for reaping the benefits of the monetary policy.

Umesh Revankar, MD and CEO, Shriram Transport Finance

The RBI has retained the present rate of 5.15 percent due to inflation concerns. The attention-grabbing aspect of the policy is a marginal improvement in IIP, manufacturing index (PMI) and service index. These numbers depict the beginning of increasing activity though still under wait and watch radar to bring in any further excitement. We believe that all the policy decisions along with the pro-consumption Budget corroborate that there would be better demand from the consumption side. Once that increases, automatically there will be better credit demand.

Anish Teli, Managing Partner, QED Capital

The RBI has chosen to hold onto interest rates for the time being, and retained policy space for use in case need arises in the future. While current inflation is high, they expect it has peaked out and should soften soon. The policy also has some specific calibrated measures for sectors namely Auto, Residential Housing and MSME. Benchmarking loans to MCLR and Operation Twist seems to have resulted in better transmission of rates. Therefore it has been a fine balancing act while maintaining an accommodative stance.

Manju Yagnik, Vice-Chairperson Nahar Group and Vice President NAREDCO (Maharashtra)

After a subdued Budget 2020-21, the RBI’s Monetary Policy was an event that the real estate sector was pinning its hopes on. While the apex bank in its sixth Bi-monthly Monetary Policy Statement for 2019-20, kept the repo rate unchanged at 5.15 percent, continuing with an 'accommodative' stance, to keep the inflation in check, it came out with significant announcements today to address concerns of the real estate sector. The lower provisioning requirement for retail loans being extended to the housing segment will help in lowering the cost of home loans. Also, the decision to extend the date for commencement of commercial operations with regards to project loans for commercial real estate would complement the initiatives for the real estate sector taken by the government last year. The RBI has reduced the repo rate by a cumulative 135 basis points in 2019, and it’s important that the central bank ensures proper transmission of the rate cut by banks to make home loans more accessible for consumers, thereby boosting housing demand. There's also a need to bring in measures to boost credit supply from banks and NBFC sector for developers.

Kumaresh Ramakrishnan, CIO-Fixed Income, PGIM India MF

The RBI kept policy rates unchanged while reiterating its accommodative stance at today’s meeting. Even as it acknowledges an uncertain inflation outlook, the policy clearly attempts to push growth for the present. Through a CRR dispensation on incremental retail loans given to auto, residential housing, and MSME until July 31, 2020, the policy aims to nudge banks to expand credit. Also, a one-time restructuring relief on overdue MSME loans and realty loans is proposed which should help prevent any further asset quality slide. The RBI expects growth for FY 2020 to pick up to 6 percent on the back of a rebound in rural consumption, easing global trade, better monetary transmission and personal income tax reliefs offered in the budget. The short term yields are expected to marginally soften post policy, while the long term yields are likely to remain stable. This, in turn, should favor the short and medium-term funds which invest predominantly in these securities.

Amit Jain, MD, Arkade Developers

Contrary to industry expectations, this is the 2nd time repo rates are unchanged. The belief is that credit take-off will resume, which is why policies are holding this firm, however this has not happened.  Our economy is currently at a point where much can and needs to be done to instill confidence in the buyer and create a scenario where it will boost investments in the business. Furthermore, the RBI is apprehensive that further rate cuts of 25 bps will put the industry in the 4 percent-plus range and the barrier of 5 percent would be broken. Overall what it is showing the approach of just wait and watch, rather than deciding and acting out for a remedy.

Shishir Baijal, Chairman & Managing Director, Knight Frank India

We are delighted with the MPC stance that has taken note of the concerns of the real estate sector making significant announcements today. With the lower provisioning requirement for retail loans extended to housing segment, we hope that the new measure will translate into lower cost of loans for home buyers as well. The encouragement also comes to the development side of the business where the long – standing industry demand for asset classification has been addressed. This will augment liquidity situation for developers too. With these two significant initiatives by the RBI, the real estate sector will hope to make a faster come back.

Anshuman Magazine, Chairman & CEO - India, South East Asia, Middle East & Africa, CBRE

The RBI decided to keep the repo rate unchanged at 5.15 percent and continue with its accommodative stance for as long as necessary to revive economic growth while ensuring that inflation remains within the target. The decision could be attributed to green shoots of economic recovery in the form of an improved index of industrial production and core sector performance. While the recent budget laid the long-term plan for the economy, the decision to not raise the repo rate in the face of growing inflation is an indication that the RBI is looking at the bigger picture of economic growth. This coupled with measures that were announced for real estate, MSMEs and HFCs are steps that will assist the government and central bank in invoking investor confidence in the economy.

Ashok Mohanani, Chairman EKTA World and Vice President NAREDCO Maharashtra

After a rate cut for five times in a row last year, the RBI kept the repo rate unchanged for 2 consecutive times at 5.15 percent to continue with the accommodative stance as long as it is necessary to revive the growth of the sector. The overall real estate sector will see stability in terms of investment and purchase behavior. With this, the infrastructure prices are likely to remain stagnant which will keep the prices stable for real estate sector. Though the marketers were expecting a cut in the repo rate along with the restructuring in loans after the Union Budget 2020, the unchanged repo rate will have steady growth in the sector at large. Another impetus for homebuyers will be the CRR leeway for existing and incremental loans will help the stimulus package announced. The RBI announced liquidity measures leading to improvement in sentiment and anticipation of increased liquidity in the market.

Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance

As expected, the RBI has maintained status quo on policy rates & policy stance. However, the RBI has incentivised credit flow (retail loans) to certain stressed sectors like Auto, housing and MSMEs, by exempting them from CRR on incremental credit to these sectors till July 2020. Also, the liquidity framework has been tweaked to some extent to allow long term borrowing through a repo, and this will reduce funding cost for banks and corporates. These measures will help to increase monetary transmission and help to revive credit growth, which has slowed down over the past few months. CPI inflation projection is revised upwards to 6.5 percent for Q4 FY20, 5.4-5.0 percent for H1 FY21 (vs 4.0-3.8 percent earlier), but expected to fall sharply to 3.2 percent in Q3 FY21. GDP growth is projected to recover to 6 percent in FY21, from 5 percent in FY20.

Anuj Puri, Chairman, ANAROCK Property Consultants

As expected, RBI has kept the repo rates unchanged at 5.15 percent while maintaining an accommodative stance. Though a rate cut would have been welcomed by the real estate sector as a sentiment-boosting factor, a meagre change in repo rates would have done little to significantly boost consumer sentiments. As such, previous rate cuts did prompt some banks to lower their interest rates in the recent past - but that had no significant impact on residential real estate sales. However, in a major relief to the real estate sector and further complementing many of the previous initiatives by the government in 2019, RBI has decided to extend the restructuring of project loans by a year. Loans for projects that have been delayed for reasons beyond the control of their promoters have been extended by another one year without downgrading the asset classification. This aligns with the treatment accorded to other project loans for the non-infrastructure sector.

Sudhakar Shanbhag, Chief Investment Officer, Kotak Mahindra Life Insurance

All the six MPC Members voted to hold rates at 5.15 percent, in line with market expectations. The committee recognizes that there is policy space available for future action. The path of inflation is, however, elevated and on a rising trajectory through Q4:2019-20. The MPC decided to persevere with the accommodative stance as long as necessary to revive growth while ensuring that inflation remains within the target. The RBI also announced some measures to boost the real estate sector. To boost consumer home and auto loans, for the next six months, banks will be allowed to deduct the equivalent of incremental credit disbursed by them as retail loans from their net demand and time liabilities (NDTL) for maintenance of cash reserve ratio.

Arun Singh, Chief Economist, Dun and Bradstreet India

The RBI’s move to keep policy rate and monetary stance unchanged will help in controlling inflationary expectations and providing support to growth. The sharp rise in the inflation rate has constrained monetary policy rate cut. Now, RBI’s focus has to be on the monetary policy transmission in the credit market as the full benefit of a rate cut has not been passed to the consumer yet. The lower lending rate will provide some respite to investment rate and growth going forward. The surging inflation and slowing growth are raising serious concerns about the future growth prospects of the economy.

Mihir Vora, Director & Chief Investment Officer, Max Life Insurance

In the Monetary Policy announcement today, RBI left rates unchanged, in line with market expectations. The members voted unanimously (6-0) in favor of the rate pause and for continuation of the accommodative stance. This is growth-supportive and will be taken positively by the debt and equity markets. The Governor also mentioned that there is space available for future action, which is also a positive statement. The RBI’s decision was on the basis of complex growth-inflation dynamics. The CPI inflation projection is revised upwards by 120-140 bps for the first half of the next financial year, factoring in the uncertainty in food and fuel prices, higher costs and elevated inflation expectations. On the other hand, RBI acknowledged the pervasive growth slowdown and projected GDP growth of 6 percent for FY21, higher than the 5 percent expected in FY20. The higher growth next year is projected on the back of higher expected rural incomes, increased infrastructure spending, easing global trade uncertainties, monetary transmission of the actions so far and rationalization of personal income taxes.

Ravikant Bhat, Analyst, BFSI & Insurance, IndiaNivesh

The RBI expectedly held the policy rates even as it raised the near term inflation forecast to 6.5 percent. However, noting improved arrivals of Kharif and Rabi harvests and easing household inflation expectations, the inflation is forecast to ease to 3.2 percent by Q3FY21E. The accommodative stance of the policy along with multiple supportive measures for MSMEs, NBFCs, and banks are stepping in the right direction which will help ease credit flow, help banks manage stress and soften loan pricing.

Arun Nathani, CEO & MD, Cybage Software

We see that the government has come up with a new charter. It is clearly an extension of ambitious schemes for all the industries. With G-sec ETF opening a new door for retail investors and abolishing DDT to generate a higher disposable income, we understand that the government is serious about making India a strong economy.