April 4, 2019 / 7:00 AM / 2 months ago

INSTANT VIEW 5-India's central bank cuts rates by 25 bps, as expected

BENGALURU, April 4 (Reuters) - The Reserve Bank of India cut its benchmark interest rate by 25 basis points on Thursday, in a widely expected move to boost the economy, while keeping its monetary policy stance “neutral” despite subdued inflation.

The six-member monetary policy committee (MPC) cut the repo rate to 6.00 percent as predicted by 57 of 67 analysts polled by Reuters last week. The reverse repo rate was reduced to 5.75 percent.

COMMENTARY SHILAN SHAH, SENIOR INDIA ECONOMIST, CAPITAL ECONOMICS, SINGAPORE “We and most other forecasters anticipated the move. The decision was driven ostensibly by the recent weakness of headline inflation, which despite rising in February is still below the RBI’s 4 percent target.”

“The fact that the MPC lowered its inflation forecasts for the next six months suggests that further loosening might follow in the near term.”

“However, we maintain our view that looser policy would be a mistake. Spare capacity is tight and core inflation – a better measure of underlying prices pressures – remains high.”

“And with a growing perception that the RBI’s credibility as an inflation fighter is being eroded under the new governor, further policy loosening raises the risk that inflation rebounds strongly and ultimately requires interest rates to be higher in future.”

ANAGHA DEODHAR, ECONOMIST, ICICI SECURITIES, MUMBAI “They have lowered the GDP growth outlook, which is largely in-line with market expectations. On the inflation side, they have lowered H1 and H2 FY20 numbers, I think they have decided to err on the side of caution.”

“I think the actual inflation outcome would be higher than what the RBI has anticipated. A monsoon which is below normal and election outcome are definitely upsides to the inflation trajectory.”

“I don’t think their stance will change. Neutral stance is the safest because it gives them flexibility on both sides. I think they have started to play safe because inflation is expected to go up from here. Changing stance would not make any sense at this point, it will remain neutral in the foreseeable future.”

SANDIP SOMANY, PRESIDENT, FICCI “We welcome the rate cut, though we had expected a larger cut given benign inflation, slowing industrial as well as exports growth and liquidity concerns. We hope that the two consecutive cuts would translate into lower lending rates for both retail and corporate credit. This would give an impetus to the economy through greater consumption demand and private investments. This is important as we do not foresee much impetus coming from external sources of growth as the global economy continues to show signs of moderation.”

“Over the last few months, there has been an improvement in capacity utilisation across sectors as well as reduction in banking NPAs. The need of the hour is for the monetary policy to complement the fiscal policy and strengthen the growth impulses that are slowly building in the economy. The real repo rate has remained high for a long time and there is a scope for further reduction in the repo rate. We do hope that the RBI shall continue the accommodative stance in subsequent months as well.” LAKSHMI IYER, CHIEF INVESTMENT OFFICER (DEBT) & HEAD PRODUCTS, KOTAK MAHINDRA ASSET MANAGEMENT COMPANY “The rate cut of 25 bps is in line with expectations. For markets, the cat was already out of the bag and hence, the muted response to the rate action. Growth outlook and inflation forecast (are also) lowered. Short-end rates could remain anchored. The election’s outcome will now hog the limelight.” DHANANJAY SINHA, HEAD OF INSTITUTIONAL RESEARCH, EMKAY GLOBAL FINANCIAL SERVICES LTD, MUMBAI “Uncertainty is fairly high in the context of possible El-Nino effect and which government will come in next.”

“On the fiscal front, there is significant slippage which will impact inflation numbers. Overall, I think RBI has taken an incremental view and how the above factors pan out will dictate what it does next.”

“I think at this juncture there is a large amount of uncertainty and one cannot commit to a certain stance.” V K VIJAYAKUMAR, CHIEF INVESTMENT STRATEGIST, GEOJIT FINANCIAL SERVICES, KOCHI “The MPC lived up to the consensus by cutting rates... while continuing with the neutral policy stance. A key takeaway is the projection of benign inflation for FY 2020 which has come below expectations, between 2.9 to 3 percent for H1 and between 3.5 to 3.8 percent for H2. This means that the headline inflation is unlikely to go beyond 3.8 percent anytime in FY2020.

“Since the GDP growth rate for FY 2020 has been lowered to 7.2 percent in this benign inflation scenario, one can expect more rate hikes, probably two more this CY. The stance has been maintained at neutral, perhaps in the context of rising crude prices and concerns regarding a below normal monsoon.”

“The market trend, going forward, will be influenced by capital flows into the market. So long as the Fed and ECB remain dovish, more flows can be expected, which can impart resilience to the market. However, the high valuation of the market remains a concern.”

AMAR AMBANI, PRESIDENT & HEAD OF RESEARCH, YES SECURITIES, MUMBAI “While the stance is neutral, it clearly shows that they are actually turning accommodative. It’s only a matter of time before they change the stance as well. Also, they moved away from their inflation projection. Clearly, there is complete focus on supporting growth and providing liquidity.”

“While they kept it at neutral, this clearly opens the door for more cuts going forward. They’ll cut more in 2019.”

“Whichever government comes next, there is a risk of increased bond supply in FY20, as both major political parties announced plans to dole out money to farmers. And, if some of these plans go through, there is a risk of increased bond supply and there is not going to be too much demand for bonds, unless there is demand from FPIs (foreign portfolio investors).”

“The RBI at some point will have to pause and see how it goes. They have a lot of factors to watch out for such as El Nino and inflation.”

DR. JOSEPH THOMAS, HEAD RESEARCH - EMKAY WEALTH MANAGEMENT, MUMBAI “The RBI has adopted a very sensible and pragmatic approach by cutting the repo rate by 0.25 percent while keeping the policy stance neutral.”

“It takes cognizance of the likelihood or potential for inflationary pressures emerging from food prices and fuel prices, and also fiscal pressures from the large government borrowing programme.”

“Liquidity management through OMOs, repos and also the occasional currency swaps would help a somewhat better propagation of the impact of rate modifications to the lower levels.”

INDRANIL PAN, CHIEF ECONOMIST, IDFC FIRST BANK, MUMBAI “I’m happy to see the RBI is not toeing the market line because markets were expecting a much more dovish tone. They have kept inflation balanced even thought their forecast is well contained within the 4 percent trajectory.”

“We need to watch out how the monsoon pans out. The real issue is when food prices will actually reverse, we’ll have to see if the trigger for that would be a lower monsoon. This is something we must factor in before the MPC moves next.”

“My bet is that the next meet can be a miss from the RBI, unless you see a downside to the inflation trajectory. If inflation continues to rise gradually then the RBI would possibly stay on hold.”

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI “While the RBI has highlighted the upside risks to inflation, on account of El-Nino, food prices and fiscal situation, I think the tone is largely dovish.”

“If we see the Congress party’s manifesto, it is a fiscal-expansionary policy, and even for the incumbent government, there is an emphasis to address rural distress, the unemployment situation, so these will have some fiscal implications. Whether the Goods and Services Tax collection will stabilise remains to be seen, but prima facie the fiscal situation will remain a concern irrespective of which government comes to power.”

“If inflation continues to undershoot the 4 percent level, a rate cut of 25 to 50 bps cannot be ruled out in the next 12 months.” (Reporting By Arnab Paul, Chandini Monnappa and Krishna V Kurup in Bengaluru; Compiled by Subhranshu Sahu)

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