RBI maintains status quo: Central bank policy on expected lines; guidance 'pragmatic', say bankers

The Reserve Bank's decision to maintain status quo on rates Wednesday did not surprise bankers, who said the move was "pragmatic" and "accommodating" as also more in consonance with market expectations. At the same time, they hoped the central bank going forward would ease its monetary policy to support the economy if upside risks to inflation do not materialise.

The RBI in its fifth bi-monthly monetary policy review kept the repo rate unchanged at 6.5 percent. It also lowered the retail inflation forecast for the second half of the current fiscal to be in the range of 2.7-3.2 percent.

Commenting on the RBI policy, SBI Chaiman Rajnish Kumar said the decision to keep rates on hold was more in consonance with market expectations but the "policy guidance was a pleasant and pragmatic surprise". He further said the significant downward revision in inflation projections and assurance of continued durable liquidity was most reassuring to market participants in terms of a stable and predictable interest rate structure.

B Prasanna ICICI Bank Head-Global Markets Group, said the post-policy statement by RBI governor Urjit Patel emphasised the scope of change in the policy stance if upside risks to inflation do not materialise. "Going forward, we believe the Monetary Policy Committee (MPC) is likely to remain on a prolonged pause. This also gives us confidence that the scope for a cut in rates becomes possible if realised inflation in the next few months were to confirm or undershoot the revised path forecasted by the MPC," Prasanna said.

Hopeful of future rate cuts, Standard Chartered Bank India CEO Zarin Daruwala said the MPC maintained its stance of calibrated tightening and it was heartening to note that the panel was ready to ease monetary policy to support the economy. The sharp reduction in the inflation forecast accompanied by planned SLR cuts should result in lower costs for borrowers and the move to link retail/ MSME loans to external benchmarks should also result in better monetary transmission, Daruwala added.

The Monetary Policy Committee (MPC) in its fifth bi-monthly meeting kept the repo rate as well as the CRR unchanged. The committee decided to cut the Statutory Liquidity Ratio (SLR) to 18 percent from 19.5 percent in a gradual fashion, viz. cut by 25 basis points each quarter starting with the January-March, 2019 quarter. This is with the objective to align SLR with the Liquidity Coverage Ratio (LCR) requirement. The scheduled commercial banks have to reach the minimum LCR of 100 percent by 1 January, 2019. The assets allowed to be reckoned as Level 1 High Quality Liquid Assets (HQLAs) for the purpose of computing the LCR of banks include Government securities in excess of the minimum SLR requirement.

The Inflation expectations of households, measured by the November 2018 round of the RBI survey, softened by 30 basis points to 3.7 percent for the three-month ahead horizon reflecting decline in food and petroleum product prices, while they remained unchanged for the twelve-month ahead horizon at 4.8 percent, said Ranjeet S Mudholkar, Vice Chairman and CEO, FPSB India. The MPC noted that excluding food items, inflation has remained sticky and elevated, and the output gap remains virtually closed, he said.

Representational image. Reuters

Representational image. Reuters

On allowing non-resident entities to access the interest rate derivatives, Daruwala said it will help banks to better manage their risks, while SBI Chairman Kumar said the move will add depth to the market in terms of broad-based participation.

R K Gurumurthy, Head Treasury, Lakshmi Vilas Bank, said, "The focus in this policy has been on addressing the issues around structural and systemic liquidity. Growth forecast has been retained, possibly due to the belief that an output gap has closed and GDP growth should remain robust."

Bank of India MD and CEO Dinabandhu Mohapatra said the RBI has reiterated its commitment to managing inflation at 4 percent level while taking care of real economic growth at the same time. "Moreover, the intent of the policy seems supporting growth in the near-term. The move is also expected to alleviate the liquidity concerns amongst the market participants," he added.

"The MPC’s decision to hold the policy rates steady was along the expected lines, " said Rajni Thakur, economist, RBL Bank. "However, the commentary focussed on pick up in industrial activities and capacity utilisation should allay some of the market fears of low growth momentum for the next few quarters. The central bank has kept its options for further rate actions open with a downward revision of inflation projections and also retaining its stance of ‘calibrated tightening’," she said.

Yes Bank Chief Economist Shubhada Rao said the status quo on repo rate was on expected lines, the substantial revision in inflation premise could warrant a prolonged pause on monetary policy rate amidst some upside risks coming from both domestic and global factors.

Shanti Ekambaram, President Consumer Banking, Kotak Mahindra Bank, said, "A benign inflation trajectory over the next six months and more stable macroeconomic factors augurs well for the economy."

ICRA Managing Director and Group CEO Naresh Takkar said the status quo on monetary policy stance is in line with expectations, necessitated by the continuing uncertainty related to major components of the inflation outlook.

Chandra Shekhar Ghosh, MD and CEO, Bandhan Bank, said the decision of the RBI to keep the rate unchanged will infuse confidence on the cost of liquidity. The linking of floating rates to external benchmarks will lead to a reduction in credit costs in the long run for retail and MSME sector, he said.

"Easing liquidity pressure in the banking system and accelerating the growth momentum has clearly been the focus of the Reserve Bank of India. Aligning the monetary policy committee's projection on inflation and growth trends will set the interest rate trajectory for 2019," said Rajiv Sabharwal, MD & CEO, Tata Capital.

Bekxy Kuriakose, Head- Fixed Income, Principal Mutual Fund, said the RBI MPC "kept key repo/reverse repo rates unchanged as expected and also maintained the stance at “calibrated tightening” with one dissenter Dholakia who wanted change to neutral stance. Expectedly while MPC notes the recent softening in headline CPI inflation, fall in crude oil prices and weakness in global economic activity, MPC remains cautious of inflation ahead and also highlighted fiscal risks. The inflation forecast for H2 2018-19 has been reduced to 2.7-3.2 percent from 3.9-4.5 percent in previous October policy. Growth forecasts have been broadly kept unchanged. Under Developmental Policies of the RBI, one of the key developments is that RBI has decided to reduce the SLR in quarterly phases of 25 bps till it reaches 18 percent (currently 19.5 percent) of NDTL. This is to align the SLR with LCR requirements."

Essel Mutual Fund CIO Viral Berawala, said the monetary policy was in line with expectations. "RBI’s willingness to inject liquidity and change its stance depending on incoming data are welcome moves for bond markets. We feel the policy is positive from a medium-term perspective though it may be premature to make long-term conclusions on bond markets from this policy.”

"It is a positive sign that the RBI has kept rates unchanged given in the current volatile liquidity scenario. A pause will also give a breather to the NBFC sector in terms of cost of funds. We have been anticipating some relaxation in terms of liquidity measures to improve the flow of funds, as was announced in the previous RBI policy, however, it has not come through. The need of the hour is to facilitate the flow of funds to the NBFCs and HFCs so that the informal segment of customers and the MSME sector get the much-needed funds," said Sanjay Chamria, VC and MD, Magma Fincorp.

Zarin Daruwala, CEO, India, Standard Chartered Bank, said, "While the MPC maintained its stance of calibrated tightening, it was heartening to note that it was ready to ease monetary policy to support the economy. The sharp reduction in the inflation forecast accompanied by planned SLR cuts should result in lower costs for borrowers. The move to link Retail/MSME loans to external benchmarks should also result in better monetary transmission. Additionally, the decision on allowing non-resident entities to access the interest rate derivative market will help banks to better manage their risk.”

"While the unchanged rates were expected, we are a bit disappointed by the unchanged stance. There has been enough of a transition in macroeconomic realities to move away from the possibility of further tightening. We believe that this is a missed opportunity and hope that it doesn't come in the way of a rate cut in the next policy round, if it is required," said Rajiv Shastri, Executive Director and CEO, Essel Mutual Fund.

Sunil Sinha, Principal Economist, India Ratings and Research (Fitch Group) said, "RBI’s move to align liquidity coverage ratio (LCR) with statutory coverage ratio (SLR) is a welcome move. According to Basel 3 norms banks are presently required to keep high quality liquid assets up to 90 percent of the stressed demand on the liability for 30 days. This is being increased to 100 percent from 1 January 2019. Thus RBI has decided to bring down the SLR to 18 percent from the present 19.5 percent by reducing it 25 basis points each over the next six quarters."

R K Gurumurthy, Head Treasury, Lakshmi Vilas Bank, said, "the surprise element was that SLR has been cut in a calibrated manner prospectively beginning January 2019, by 150 points, to align with LCR. The move may release and add to lendable liquidity locked in Government Securities. With inflation expectations lowered, this should not impact bond sentiment in the short run. Bonds have rallied on the back of the announcement that Open Market Operations will continue, and future policy and rate stance will depend on incoming data – implying a longer pause is the way forward. Inflation expectations have been sharply lowered for H2 FY 2019, which is the key driver on the day for bonds outperforming both currencies and equities."

The ‘calibrated tightening’ stance rules out any rate change in the near term, said Adhil Shetty, CEO, BankBazaar. "This is because while the high inflation levels have tapered down to a benign 4 percent, there is continued uncertainty over fluctuating oil prices, escalating trade tensions, tightening of global financial conditions and slowing down of global demand. So the RBI would require more time to decide if rates should be cut. Over time, as the global macroeconomic factors stabilise, there is a good chance for a rate cut if the inflation holds. For now, your loan EMIs and deposit rates would remain stable."

Farshid Cooper, Managing Director, Spenta Corporation said, "With this regulatory regime for the real estate sector, we expect that the unchanged repo rate of 6.50% will keep the approach steady for potential home buyers to invest. A rate cut at this stage would have helped in lowering the home loan interest rates. It could have made the home buying a reality for most buyers who have been eagerly waiting for the rates to cut down.  We hope RBI to take measures in the near future to ensure the stability is maintained in the real estate market."

“Increase in repo rate at this point of time would have been a very bad news for real estate industry which is already going through fund constraints due to NBFC liquidity issue. In fact, the industry was hoping if rates could have been reduced in this MPC meeting to revive the industry. No change in repo rate is a slightly negative news for the industry,” said Ankur Dhawan, Chief Investment Officer, PropTiger.com.

Anuj Puri, Chairman, ANAROCK Property Consultants, said the recent stand-off between the government and the RBI owing to the NBFC crisis and the apex bank’s endeavour to maintain its autonomy and reserves had caused the industry to watch closely whether the repo rate will increase or remain unchanged. "That said, the move by the RBI to keep the repo rate unchanged at 6.5 percent was more or less expected. This was not solely because inflation targets are still under control. Politically, an upward revision would not have served the current Government well as the 2019 elections are around the corner. From the economic standpoint, a hike in repo rates would have had a direct impact on home loan rates. High housing loan interest rates are known deterrents to many buyers, especially in the affordable segment where higher interest rates can and do weaken sentiment.

"The reduction in inflation forecast to 2.7 percent -3.2 percent from 3.9 percent-4.5 percent should have ideally lead to lesser hawkish monetary policy. As the shift in policy stance was done in the last meeting it was difficult for RBI to reverse the same. If one sees continued benign data on the inflation front, then one can hope for increased liquidity from rbi going forward to support credit growth," said Abhimanyu Sofat, Head of Research, IIFL Securities.

Raj Mehta, Fund Manager, PPFAS Mutual Fund said, as per street expectations, the RBI has kept the repo rate unchanged. Some analysts on the street were expecting the RBI to give a dovish commentary and change the stance from neutral to dovish. "However, since RBI had changed the stance in the last meeting itself, the probability of RBI maintaining its stance "calibrated tightening" were higher especially with elections around the corner. Even though RBI has maintained their stance, they have lowered their inflation expectations going ahead with crude prices falling and the soft CPI inflation numbers which we saw last month. I would not be surprised if we get a repo rate cut in the 1st half of 2019. On the growth side, RBI has maintained the GDP growth at 7.40 percent but has cited trade talks and slowing US GDP to be potential dampeners going ahead."

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Updated Date: Dec 06, 2018 08:03:37 IST

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