RBI keeps rate unchanged: Panel not convinced on inflation fall; experts decode statement
Inflation projections and Real GVA growth for FY18 have been lowered based on recent data releases
The Reserve Bank of India (RBI) kept its key interest rate unchanged at 6.25 percent on Wednesday, as widely expected, while lowering projections for inflation and striking a somewhat less hawkish tone in a policy statement.
Here are some experts view on the RBI policy:
Arundhati Bhattacharya, Chairman, SBI
The RBI policy to keep the repo rate on hold was on expected lines, even though reverse repo rate was hiked to 6 percent. Elsewhere, on the Developmental and Regulatory Policies front, RBI has announced a number of measures notably, substitution of collateral under LAF, allowing banks to invest in REITS and financial literacy; all these will go a long way in improving the financial system.
Chanda Kochhar, MD and CEO, ICICI Bank
The RBI’s acknowledgement of downward shift in the inflation trajectory is welcome. It is also heartening that the RBI has again reiterated its focus on resolution of stressed assets which will help to strengthen the banking system and ensure that investments made are optimally utilised. The SLR cut and reduction in risk weights for housing loans are positive moves that will support bank liquidity and encourage growth in housing loans.
Radhika Rao, Group Economist, DBS
The tone suggests they are not yet convinced that the fall in inflation is enduring, given risks from farm loan waivers and Seventh Pay Commission. In essence, the RBI remains concerned that a rate cut at this juncture might need to be reversed out next year if inflation returns to the upper end of the 2-6 percent range. Our takeaway is that the central bank is likely to maintain status quo for now. The room for a rate cut is contingent on below-target 2Q inflation, which will be available by August review, or shallow bounce in 3Q numbers.
Shubhada Rao, Chief Economist, Yes Bank
The RBI keeping the rate unchanged is pretty much in line with what was expected. The SLR cut is in line with the roadmap which was provided earlier and it also frees up quantum for credit growth. We are seeing a significant cutback in inflation forecast. The monetary policy report is projecting a much lower inflation at 2-3.5 percent in H1 and 3.5-4.5 percent in H2. It is a significant cutback on inflation trajectory and it is a risk which is waning and should clearly pave the way for RBI to cut rates. We believe that a rate cut is in the offing in the next policy meeting.
Devendra Kumar Pant, Chief Economist, India Ratings & Research
It appears more on the balanced side as neutral stance continues, although he's raised some red flags at the end. They are mildly hawkish. As of now, chances of rate cut are pretty low. What we have - the two elements are in the form on monsoon and second, how the GST will pan out. Although, the rates are decided keeping an eye on negative non-inflationary but short-term supply bottlenecks can't be ruled out.
Anjali Verma, Economist, PhillipCapital India
It's a reasonably dovish statement versus the reasonably hawkish statement in the last monetary policy. What is happening is that earlier there were concerns on monsoon which now seem to be coming out normal. On GST, also, earlier there were concerns that it could be inflationary. However, now, incrementally there is a view that it could be neutral in nature.
Lastly, on the Seventh Pay Commission, yes, RBI has been concerned. But when I talk with people in the government they say that it may not have such a big impact as RBI is forecasting.
Considering that, I think, this new projection that RBI has given today could pan out. Therefore, one will have to see how the monetary policy stance could change going ahead depending on this inflation number.
Hitesh Jain, Senior Reseach Analyst, IIFL Wealth & Asset Management
RBI's stance will be absolutely data dependent. I think the status quo will be intact for 2-3 months. Any policy move will probably happen by end of this calendar year. As long as the inflation is within RBI's range, we'll not see a policy change. But if inflation sustains at current corridor, we'll probably see a rate cut. They (RBI) have yet not gauged the impact of central pay commission. The recent slowdown like the note ban could be transient. Now, the economy is optimally remonetised. So I think we can come back to the old growth numbers of 7 percent in a quarter or two.
Sudhakar Pattabiraman, Head, Research Operations, William O’Neil India
There was no possibility of interest rate cuts at this point, as there is currently a lot of uncertainty surrounding GST implementation and geopolitical issues. We expect the RBI to cut rates in its next policy meeting in August, provided the monsoon progresses well, in line with Meteorological Department's forecasts, and inflation does not spike after GST rollout. We could see inflation rate going up marginally in H2 2017, depending on how the monsoon and GST implementation play out.
Bekxy Kuriakose, Head - Fixed Income, Principal Pnb Asset Management Company
As expected by us, the RBI kept key rates on hold and maintained their neutral stance. Inflation projections and Real GVA growth for FY18 have been lowered based on recent data releases. On GST RBI assesses that it may not have a material impact which is comforting. RBI appears to be against taking premature action on rate front and would like to observe further data prints on inflation and real activity front. The key concern remains the state of banks’ balance sheet including much needed recapitalization. Given recent data prints, ample banking system liquidity and macroeconomic stability on domestic front we think gilt and bond prices will we well supported post RBI policy.
Abnish Kumar Sudhanshu, Director & Research Head, Amrapali Aadya Trading & Investments:
Reading RBI credit policy we could see it is readying for a rate cut in next policy meet on August. On its own estimate inflation is projected at 2-3.5 percent in H1 of this FY. Though it is continue to hold its neutral stance but it can change its stance to accommodative one if inflation remains on the projected path. Among the sector Housing Finance is clear beneficiary of the latest RBI move on risk weighted assets and that will be a boost to the realty and building material sector.
Ranjeet Mudholkar, Vice Chairman and CEO, FPSB India
While RBI has maintained the repo rate unchanged at 6.25 percent, however the SLR is cut SLR by 50 bps: Additionally the inflation forecast is reduced as well. Probably, the recent move by RBI is more to do with maintaining stability than the inflation adjustment or liquidity as well. The market seems to have taken the same positively as well. Notwithstanding the same the interest rates especially the housing interest rates are expected to continue to fall further, especially when taken together with the push to the housing sector that is being noted. Under the present circumstances, it is important from Financial Planning perspective that the financial consumers should not overexpose themselves to debt more than what may be warranted.
Avnish Jain, Head – Fixed Income, Canara Robeco
The policy was on expected lines with RBI keeping key rate repo rate unchanged at 6.25 percent. However RBI lowered its forecast for inflation for the 1H2018 at 2-3.5 percent and for second half at 3.5-4.5 percent. While acknowledging slowdown in CPI inflation, the MPC members chose to wait for more data points for any action, which is likely to be a rate cut. RBI highlighted global socio-political risks, farm loan waivers and impact of 7th pay commission adjustments as upside risk while noting that GST is unlikely to have material impact on inflation.
Surendra Hiranandani, Chairman & MD, House of Hiranandani
As widely expected, the Reserve Bank of India maintained status quo on interest rates for the forth time in a row, but lowered its inflation forecast for the current fiscal. We feel that the central bank decided to wait for the 1 July rollout of the GST and assess the impact of the new indirect tax regime on inflation before tinkering with the policy rates. However, it should be noted that inflation has been under control for long and is likely to remain so on the back of good monsoon forecast. As per recent reports, consumer price inflation slowed down to 2.99 percent in April and economic growth during the last fiscal was at its slowest pace in two years coupled with weakest loan demand since at least 1992. Hence, a reduction in borrowing cost could have provided the much needed impetus for growth in the near term.
Ganesh Vasudevan, CEO, Indiaproperty.com
Reserve Bank of India did not change the repo rate as expected. But high value home loans above Rs 75 lakhs might get cheaper with the reduction in risk weightage on home loans above Rs 75 lakh to 50 percent from its earlier value of 75 percent. Till date most of the benefits were given for purchase of lower ticket price properties. This might have an impact on the slow moving luxury property market in tier 1 cities.
Ashwin Sheth, CMD, Sheth Corp
Although SLR was cut by 50 basis points to 20 percent, it will certainly instill more liquidity into the banking system which will indirectly help banks to lend more money. Housing loans possibly will get cheaper as provisioning requirements get reduced. However many banks have already cut down their interest rates which is a positive sign for the home buyers.
(With inputs from Reuters)
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