RBI policy: Inflation concerns seem to have taken front-seat again, expect more rate cuts next year, say experts

The Reserve Bank of India (RBI) kept its key lending rate on hold in a shock decision on Thursday, despite a worrying slowdown in the country that prompted the central bank to sharply reduce its economic growth forecast to 5 percent for the year through March.

Experts weighed in with their comments:

Kumaresh Ramakrishnan, CIO- Fixed Income, PGIM India Mutual Fund

In contrast to market expectations, RBI decided to take a breather, retaining a status quo on policy rates at the 5th bi-monthly MPC meeting. However, it retained the ‘accommodative stance’ signalling that the rate cut cycle was not over.

The status quo on rates appears to have been influenced by a change in inflation dynamics since the October policy. RBI observed that food inflation has spiked sharply to 6.9 percent in October, a 39-month high and likely to remain so in the coming months. Further, proposed revisions in telecom tariffs is also likely to push up core inflation.

RBI also slashed its GDP forecast for FY 20 by 110 bps to 5.0 percent, while forecasting a rebound to 5.9-6.3 percent in H1 of FY 21. CPI also was revised higher by 130 bps to almost 5 percent for the second half of FY20.

Given the unchanged stance, the risk of a reversal in the direction of rates is low. However, the unexpected halt in the rate cut cycle and lack of clarity on fiscal slippage will push up long end yields (10 years and longer). This, in turn, should favour the Short and Medium term funds which predominantly invests in securities in the 2-5 year segment.

File image of RBI governor Shaktikanta Das. Reuters

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

RBI has taken an accommodative stance with temporary pause in the rate cut. The regulator is looking to make the next cut at a time when it will have the optimum impact. With liquidity remaining in surplus since June and the 135 bps cut till date, the impact will eventually play out in its expected actuality which will help real estate sector in the long term.

Madhavi Arora, Lead Economist, FX and Rates, Edelweiss Securities, Mumbai

We think that this easing pause is temporary. In a situation when growth slowdown looks more entrenched and underlying core inflation has slumped to sub-3.5 percent amid widening output gap, the monetary accommodation still has further steam for another 50 bps in this rate-cut cycle. That said, we reckon with the RBI that a coordinated policy response both by the government and the RBI is required in the current slowdown cycle.

However, we do realise the policy paradigm has to move beyond rate cuts and conventional fiscal easing. The policymaker should continue to address the problem of credit and business confidence and overall financial stability to break the selective liquidity trap for optimization of the rate transmission.

Sunil Rohokale, Managing Director and CEO, ASK Group, Mumbai

The RBI should focus on earlier rate-cut transmission aggressively. The wider credit flow from banks, HFCs and NBFCs would be crucial to GDP growth of 5-6 percent in the next few quarters. The most distressed sectors like real estate and MSME credit flow is completely frozen and the crisis of confidence is grave.

We cannot dream to have GDP growth of 6 percent-plus without real estate and MSME sector recovery, which are significant contributors to economy and job creation.

Rajani Sinha, Chief Economist, Knight Frank, Mumbai

Given the growth concerns, we still feel there are chances of one more rate cut by April 2020. The RBI’s growth projection could still be marginally revised downwards going forward, especially for first-half of 2020-21. Growth has slowed on all quarters - investment, consumption and exports. Hence, the revival is likely to be slow and painful.

"Given the poor aggregate demand scenario, I do not see overall inflation posing a serious threat. There is a need for further fiscal stimulus. In fact, a direct measure like income tax cut will provide immediate boost to consumption. Monetary policy decision could be put on hold if the government comes up with strong fiscal stimulus, as the central bank would be wary of the inflationary impact of the same."

Nikhil Gupta, Chief Economist, Motilal Oswal, Chief Economist, Motilal Oswal Financial Services, Mumbai

Overall, today’s status quo increases the credibility of RBI’s inflation mandate. We had always believed that today’s cut would be the last rate cut in this cycle. We continue to maintain that there will be no more rate cuts now unless inflation falls back towards 4 percent.

Sudhakar Shanbhag, Chief Investment Officer, Kotak Mahindra Life Insurance Company, Mumbai

Against an almost consensus market expectation of a rate-cut based on the slowdown seen in growth, the MPC seems to have chosen to focus on its mandate of inflation management and have recognised that the latest CPI print and expected prints over next few months would be higher than their targeted level and also a belief that past rate-cuts will help to support growth with focus on transmission.

Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank, Mumbai

It is a surprise, but having said that I think the RBI has preferred to stay cautious because inflation numbers in the near-term seem to be ahead of its medium target.

We continue to see room for 50 bps rate-cut ahead, but we’ll have to wait for food price correction to happen before we can start expecting that. The RBI has slashed its growth rate quite a bit now to 5 percent. Having said that, we see further downside risk to this growth at this point. We are looking at 4.7 percent.

The government has very limited fiscal headroom. In terms of big ticket measures, it will be difficult for the government to take measures. They will have to do some small tweaking in terms of rural spending and boost to real estate demand.”l

Suddhartha Sanyal, Chief Economist and Head of Research, Bandhan Bank, Kolkata

This is a pause, but definitely not the end of the easing cycle. The debate in the coming few months will remain between a cut and hold. An accommodative stance doesn’t necessarily mean a rate cut in every single monetary policy meeting.

It was a close call this time for the MPC, whether to cut or not to cut rates. Given that there is a bit of pressure currently on headline inflation, RBI opted for a pause.

Going ahead, inflation numbers for the next one or two prints may actually move higher, breaching the 5 percent mark. Since broader inflation trends are very much under control, I don’t think today’s pause will be a long-term stance. Once the headline numbers soften — and that should happen relatively soon — it will open up the space for the RBI to deliver more rate cuts.

Anagha Deodhar, Economist, ICICI Securities, Mumbai

The MPC’s decision to pause is indeed surprising. This review marks a break from past trends as inflation concerns seem to have taken front-seat again.

Although they have stated that there is space for future action, I do not see rates going down by much in FY20 as inflation is expected to inch up sharply from here. The effectiveness of monetary policy in stimulating growth is limited in the current context.

The recent GDP data showed that government spending is the only strong leg of the economy currently. I think the government will let go of the deficit target this year and try to boost growth through increased spending. We could see more sector-specific relief and/or stimulus packages in the coming months.

Fiscal slippage is generally perceived negatively by the MPC. However, in the current context, I think the MPC will be more tolerant of fiscal slippage and continue with accommodative cycle.

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

Cumulatively, monetary policymakers have done everything that was expected of them. Their revised projections of GDP and CPI inflation are realistic.

Going ahead, we need more actions from the government - Centre, states and local bodies that will make “spending” and “taxation” more efficient. This is a deep and protracted slowdown and India will witness a gradual recovery rather than a V-shaped recovery given the headwinds in both domestic and global economies.

Sakshi Gupta, Assistant Vice-President, HDFC Bank, Gurugram

The RBI’s decision was a surprise, especially the fact that it was a unanimous decision. In the growth-inflation trade-off, the RBI has clearly leaned towards the latter.

We do not think that the recent inflation spikes are permanent and as food prices stabilise, headline inflation is likely to cool off by the beginning of next fiscal year. More importantly, core inflation momentum continues to remain weak.

Given the outlook on inflation and as RBI stance remains accommodative, we do not think this is the last cut in the current cycle but probably a brief pause. Growth momentum is likely to improve gradually, and therefore, it is likely to warrant further rate cuts.

Rajesh Cheruvi, Chief Investment Officer, Validus Wealth, Mumbai

The MPC unanimously and shockingly left rates unchanged, but maintained accommodative stance against consensus market expectations of 25 bps cut. Given the widening fiscal deficit concerns, G-Sec supply pressure and wider-than-average spreads, we prefer good-quality corporate bonds over G-Secs. Any truce on the trade war and growth positives will benefit short vs long duration, which is our preferred strategy.

Jimeet Modi, CEO, Samco Securities, Mumbai

The RBI has finally thrown the ball back in government’s court to revive the economic engine, which has further deteriorated since the last meet. Transmission of interest rates have not happened yet, which could be one of the reasons the RBI waited to cut rates and nudged the government and banks to take efforts from their end. Additionally, slightly higher inflationary tendencies might have also led to the pause in rate cut.

However, this is a negative for the markets as a rate cut was required to boost risk-taking appetite in the economy.

Darren Awe, Asia Economist, Capital Economics, Singapore

Tentatively, we are pencilling in a 25 bps cut in February. Beyond that, the picture is less clear. A strong recovery in growth in the near term seems unlikely, but there are at least glimmers of stabilisation in the recent data. Although industry continues to struggle, gauges of services activity, consumption and credit growth have all improved a little. And the effect of past monetary and fiscal stimulus should be felt soon. Our base case for now is that the easing cycle will come to an end in February.

Kunal Kundu, India Economist, Societe Generale, Bengaluru

While the decision to pause is not entirely unjustified given the clear lack of efficacy of monetary policy actions through the policy rate cut channel, what was worrying is that the RBI did not announce any unconventional measure aimed at improving the efficacy of its monetary policy actions but rather relied on hope for better transmission of its past actions, despite the fact that the transmission of past actions till date remained rather weak.

We still expect the RBI to cut the policy rate by another 50 bps next year once the low statistical base effect reverses and headline inflation cools.

For the current financial year, aggregate demand situation looks quite grim and given the lack of discernible festival period driven bump in demand, we believe that the economy will just muddle through for the next at least six quarters.

The RBI’s downward revision of growth forecast appears prudent. What is a worry though is that the optic of high headline inflation appeared to have taken precedence over a dangerously slowing activity level.

Following today’s decision, the onus of spurring growth shifts firmly on the government. We believe that for the time being, the only short term solution is rising public spending in infrastructure that has a much higher employment elasticity and help increase the aggregate demand in the economy.

Hakim Lakdawala, Promoter, Goodwill Developers

The real estate sector along with other industries would have been happy with another rate cut, nonetheless, we respect the decision made by the Reserve Bank of India for keeping the repo rate unchanged. The Government had recently announced setting up of an alternate investment fund along with the seed money of 10000cr which will ensure movement on stalled projects in mid-segment and affordable housing. Going ahead, we look forward to the union budget and are hopeful that the government will pave way for progressive path of the sector ahead.

Chandra Shekhar Ghosh, MD and CEO, Bandhan Bank

Although Reserve Bank of India’s pause in rate cut has been against market expectations, it needs to be seen against the backdrop of a material rise in the RBI's CPI projection. On the other hand, despite projected fall in GDP growth to 5 percent, India as a country has shown resilience to the global slowdown.

Dhaval Kapadia, Director-Portfolio Specialist, Morningstar India

In an unexpected move, the RBI decided to hold the repo rate at 5.15 percent and not reduce rates at this juncture, as was widely expected by the market. Although they have stated that the Monetary Policy Committee (or MPC) recognizes that there is monetary policy space available for rate cuts in the future based on the evolving growth – inflation scenario. They appear to be providing a guidance that today’s pause may not necessarily indicate an end to the rate cut cycle.

The MPC has also decided to continue with the accommodative stance as long as it is required to revive growth, thereby reinforcing their commitment to growth along with maintaining their inflation mandate.

It appears that the RBI would like to understand the impact of their previous rate cuts (cumulative 135bps between Feb & Oct’19) on the real economy based on the transmission via lower lending rates by banks & other lenders along with measures taken by the government to revive growth, before taking further steps. They would like to optimize the timing of further rate cuts to derive full benefit of these measures.

RBI has revised its growth projections downward - real GDP growth for 2019-20 is revised downwards from 6.1 percent in the October policy to 5.0 percent –4.9-5.5 percent in H2 and 5.9-6.3 percent for H1:2020-21. Whereas, inflation (CPI) projections have been revised upwards - to 5.1-4.7 percent for H2:2019-20 and 4.0-3.8 percent for H1:2020-21 primarily due to higher food inflation which they expect to subside by Q1 2020-21.

Ramki Gaddipati, Co-founder and CTO of Zeta

This is a positive move by RBI, and will help digital payments sector broaden its horizon in India. This removes KYC obligation for a limit of up to Rs 10,000; thus breathing fresh life into the prepaid system by making it more inclusive. PPIs have been instrumental in promoting digital payments in India, and this move will help drive inclusion and deeper penetration of digital payments in India.

Abheek Barua, Chief Economist, HDFC Bank

The pause in the rate cycle comes as a surprise given the dismal growth for the second quarter of 2019-20 and the likely persistence of a slowdown. Clearly the RBI has responded to hardening headline inflation and rising inflation expectations of households. This suggests two things. Any sustained increase in headline CPI inflation (whether or not it is primarily driven by supply shortages that the RBI itself acknowledges as transitory) above the median of the target range of 2 to 6 percent will cause make the MPC anxious and translate into a pause. It also seems that the RBI wishes to see the lagged impact of its front-loaded 135 basis point cut in the policy rate along with some of the slew of fiscal measures plays out for future growth. We expect some tightening in bond yields in response to this surprise. Given the paucity of loan demand, banks are likely to chase assets and the transmission process could gain traction. However, the flight to safety and large risk premiums for risky borrowers will persist.

Sunil Kumar Sinha, Director-Public Finance & Principal Economist, India Ratings & Research (Fitch Group)

RBI in its fifth bi-monthly Monetary Policy Statement, 2019-20 kept the policy repo rate under the liquidity adjustment facility unchanged at 5.15 percent as against India Ratings (Ind-Ra) expectation of a 25bp cut. Ind-Ra believes the evolving growth inflation dynamics though provides room for rate cut, the RBI perhaps has been guided by three factors.

Firstly, a 25bp rate cut today would have meant policy repo rate declining to 4.90 thereby leaving very little head room for further monetary action. Secondly, retail inflation showing rising trend since Feb 2019 and coming in at 4.66 percent in October 2019, though largely driven by food items and thirdly allow more time for the transmission of past rate cuts to seep into the economy.

Under the current environment when both business and consumer sentiments are down a rate cut alone will not spur consumption and/or investment demand. Therefore, allowing various measures announced by the government as also the policy rate cut of 135 bps during February-October 2019 to play out perhaps is the way forward rather than reducing the headroom available for policy rate cut. However, by stating (i) to continue with the accommodative stance and (ii) there is monetary policy space for future action RBI has clearly indicated that rate cut cycle has not ended but will be contingent upon domestic and global developments.

Ketan Musale, Director, Dotom Realty

The rate cut would have been the need of the hour to provide the much-needed fillip to the real estate sector and to facilitate growth. However, the real estate industry, in particular, has been benefiting through policy interventions to stabilize the market. The country has a large number of potential home buyers and a rate cut would have incentivized to improve their sentiments. Furthermore, we look forward to the government's decisions to lower rates in the future that will contribute to strengthening the GDP growth and create a robust economic framework.

Kaushal Agarwal, Chairman, The Guardians Real Estate Advisory

The status-quo on RBI's decision to not reduce the rates comes as a surprise and contrary to the industry's expectations, which is skewed on the back of increasing inflation and depreciation of the rupee. From an economic standpoint, a cut in repo rates would have had a direct impact on home loan rates. The government had consistently looked at reducing the repo rates to boost demand.

We further hope the lenders will pass on the benefits of the previous rate-cuts which will help in the revival of the industry. We believe there is a need to reduce the borrowing cost for the customers to bring in the next leg of demand which in turn will lead to the much-required growth in the economy. However, all eyes will be on the budget now, where a lot will be expected from the Government. The continuity of reforms under the second term of the current Government is needed to boost home-buyer sentiment.

Ashok Mohanani, Chairman EKTA World and Vice President NAREDCO Maharashtra

After five times cut in a row this year, RBI decided to keep the repo rate unchanged this time at 5.15 percent and continue with the accommodative stance as long as it is necessary to revive growth. The overall real estate sector will see stability in terms of investment and purchase behavior. Monetary policy easing since February 2019 and measures initiated by the government over the last few months are expected to revive sentiment and spur domestic demand.

Keeping in mind the 135 bps change given over the year and with the revival of the industry we are still looking at a room for positive transmission for the industry. Residential home inventory being available at a great financial value and RBI maintaining the repo rate will translate into increase in demand and witness sales velocity in the residential segment. We expect a further increase in demand and an overall improvement in the health of the real estate sector.

Sudhakar Shanbhag, CIO, Kotak Mahindra Life Insurance Company Ltd

Against an almost consensus market expectation of a rate cut based on the slowdown seen in growth, the MPC seems to have chosen to focus on its mandate of inflation management and have recognised that the latest CPI print and expected prints over next few months would be higher than their targeted level and also a belief that past rate cuts will help to support growth with focus on transmission

Anuj Puri, Chairman, ANAROCK Property Consultants

Contrary to overall expectations, the RBI kept the repo rates unchanged to 5.15 percent while maintaining an accommodative stance. From a real estate point of view, rate cuts are obviously always welcome as they help improve overall sentiment. Also, lag-less transmission of rate cuts to retail borrowers as RBI has mandated banks to directly link interest rates with repo rates. The expected rate cut of 25 bps would have caused home loan values to fall below 8 percent for first time-ever.

Shishir Baijal, Chairman & Managing Director, Knight Frank India

The industry expectation was that slowing economic growth would take precedence in RBI’s policy decision. Hence, RBI’s decision to not lower interest rate has come as a surprise and a bit of a disappointment to the industry. Lower interest rate would have helped push up credit demand and investment in the economy, aiding overall economic growth.

It would have provided much required reprieve to some ailing sectors like real estate and auto. RBI has probably taken the cautious approach of wait and watch to see the effect of past rate cuts and also to assess the inflation trajectory. With economic growth remaining subdued, there are still chances of a rate cut in the next meeting.

— With Reuters inputs