RBI monetary policy: SBI chief, India Inc, brokerage disappointed on no rate cut

New Delhi: The country’s most important banker, Arundhati Bhattacharya, echoed the sentiments of many when she expressed disappointment with the Central Bank’s decision to keep policy rates unchanged today, especially since SBI’s internal analysis does not point to inflation inching upwards. Remember, except for a handful of voices, almost everyone was expecting a minimum 25 basis point cut in rates in Governor Urjit Patel’s first policy statement, given the recent demonetisation woes.

Not just the SBI chief, India Inc also seemed dejected by Patel’s reluctance to cut rates. And brokerage Anand Rathi Securities warned that since markets were expecting a cut, the immediate impact of the status quo is “negative on debt and equity and positive for the forex market”. In a note to clients, Anand Rathi gave three reasons for the Governor to hold rates.

1. Liquidity in the banking system is currently highly accommodative. Even with liquidity draining measures (additional CRR and future MSS bond issuance), the condition is likely to be better than what prevailed before demonetisation. Therefore, banks now have elbow room to transmit a greater part of the 175 basis point rate cut by the RBI since 2015. Remember, banks have not passed on all the benefits of the Central Bank’s rate cuts in the past and what the brokerage is saying is that now, they are in a position to do so. Does this mean loan rates will come down despite Patel holding his fire?

2. Second, the US Fed is likely to raise rates this month and tighten them faster than earlier expected, said the brokerage. A rate cut in India at this juncture could cause considerable volatility in domestic financial markets. This sentiment was echoed by the Chief Economic Advisor Arvind Subramanian who also said that RBI holding rates was a wise move at this juncture to prevent currency voliatility.

3. Third, with the repo rate at 6.25 percent (the rate at which RBI lends to banks) and the monetary policy mandate to maintain inflation in the 2-6 percent band, the RBI has limited scope for further rate cuts. It seems that it wants to preserve this in the eventuality of growth faltering more than expected.

SBI Chairman Arundhati Bhattacharya pulled back no punches when she told CNBC-TTV18 that the monetary policy announcement today was a bit of a “non-event”. She said “Most of us had thought that 25 basis points was a given and many of us, including me, we were rooting for an even higher number. So the fact that there was no change was definitely a little bit of a disappointment, but I suppose, what was on their minds could probably have been 2-3 things. The Governor talked about inflation, so probably what he had in mind was that oil prices may be going up. Secondly, certain commodity prices have also stabilized, though frankly, if you look at the numbers….it does not appear that inflation is showing any upward kind of a bias.”

She also said that probably, the RBI governor may have had the exchange rate in mind (while keeping rates same) since a Fed rate hike is almost certain.”One thing apparent to all of us is the fact that in the near-past, there has been massive demand destruction. And it is important at this point of time to get demand back up and for that the economy does need priming up.” She said a cut would definitely have had a very good impact on market sentiment.

The President of the Federation of Indian Chambers of Commerce and Industry (Ficci) Harshvardhan Neotia said the RBI’s stance in the monetary policy announced today belied wide expectation of a rate cut. “At this juncture a 50 bps point cut in the repo rate would have provided the needed boost to the flagging industrial economy. The consumption demand has been impacted post demonetization and a rate cut would have given a strong signal to the consumers and to the industry as well.”

Sujan Hajra and Moumita Paul Samant of Anand Rathi said in that note that they expect a 25 basis point cut in rates this fiscal. “We expect the RBI to maintain an accommodative monetary policy stance and the repo rate to bottom out at 5.75 percent - another 50 basis point rate cut – during the current monetary-policy cycle. We expect a 25 basis point rate cut this financial year.