India’s Central Bank, the Reserve Bank of India (RBI) in its monetary policy review on Tuesday has cut repo and reverse rate by 50 bps to 8% and 7% respectively. It has kept CRR unchanged at 4.75%. The bank rate has also been reduced by 50 bps to 9% with immediate effect. The marginal standing facility (MSF) rate reduced by 50 bps to 9%.
The following are expert views on today’s RBI Monetary Policy:
Arun Singh, Sr. Economist, D&B India:
Slowing down of growth momentum amidst inflationary pressures does call for a cautious manoeuvring of the policy rates as prevailing elevated interest rates is now regarded as one of the major impediments for growth. The RBI has however, in an unexpected move cut the repo rate by a 50 bps points citing concerns of growth slowing down below its post-crisis trend rate. Cutting the policy rate at a time when inflationary expectations are quite high given the incomplete pass-through of the global oil prices, rupee depreciation and the uptrend witnessed in the food prices could fuel inflationary pressures further. Though the core inflation has witnessed some abatement, further rise in food prices has the potential to feed through into core inflation going ahead. As the upside risk to the headline inflation loom large, it leaves little scope for the Central Bank to further ease the policy rates at least in the near term.
Rohini Malkani, Economist, Citi India:
While acknowledging the slowdown in growth, a key point to note is that the RBI has clearly stated that as the deviation of growth from trend is modest, upside risks to inflation persist. This limits the space for further reduction in policy rates`. Moreover, it has highlighted that the economy is likely to revert close to its post-crisis trend in FY13, which does not leave much room for monetary policy easing without aggravating inflation risks. Taking into account our FY13 expectations for growth and inflation at 7% and 7.4%, we could see at best one more rate easing later this year. However this will be data/event-dependent, with key variables to watch being (a) measures to meet the subsidy cap of 2%, (b) pass-through of oil prices, and (c) growth and inflation out turns. Upcoming policy reviews are on June 18 and July 31. The higher-than-expected rate cut resulted in the 10y benchmark bond yield 10bps lower on the day at 8.35%. Today’s rate cut, coupled with moral suasion, could result in banks lowering their lending rates.
Sonal Varma, Analyst, Nomura India:
The RBI’s forward guidance is more cautious, and indicated that lower potential growth and upside risks to inflation inherently limit the space for further reduction in policy rates. The RBI has front-loaded its rate cuts, which is prudent, given lags in policy transmission. We expect the RBI to remain on hold in June and most likely in July as well. We expect one more repo rate cut of 25bp this year. Contrary to market and our expectations of a 25bp cut, the RBI today surprised by cutting the repo rate by 50bp to 8.00%, in order to support growth. The cash reserve ratio was left unchanged at 4.75%. We believe the larger-than-expected repo rate cut was driven by four considerations:
(1) To send a strong signal (and leave no ambiguity) that the RBI wants banks to lower lending rates;
(2) An impending fuel price hike and an increase in core inflation from next month, which will limit the RBI’s ability to act in the near future;
(3) The trend of declining growth rates that needs to be reversed by boosting investments; and
(4) The sharp fall in core inflation.
Dipen Shah, Head of Fundamental Research, Kotak Securities:
The RBI has cut rates by 50bps in surprise move. CRR has been left unchanged, as expected. We believe that, the RBI has not assumed any fuel price increase while setting these targets. So, if these price increases do come, the targets for inflation and GDP growth might change. And, the RBI has clearly stated that, the fuel price increase is a pre-requisite for future rate cuts to happen. We believe that, the RBI has done its bit by reducing rates by 50bps. So, this once again brings the focus on the fiscal initiatives to be taken by the Government. For the markets, they now have only the fiscal action to look forward to. The future direction of the market hinges on how fast the Government is able to re-start the reforms process. We believe that, the Government will start taking important decisions on reforms in due course, which will provide further impetus to the overall economy in the long term. Till these initiatives are taken, markets may remain range-bound and may be dictated more by the quarterly numbers and global markets.
Naushad Panjwani, Executive Director, Knight Frank India:
The 50 bps reduction announced by the RBI will give a huge sentimental boost to the real estate sector in general and the housing loan segment in particular. Though this rate cut does not affect the fundamentals of the RE market.  We have seen a steady off-take in housing loans despite the high interest rates and real estate prices. This cut will only give it an extra fillip. However the larger impetus will come from the other measures. At present, UCBs are permitted to assume aggregate exposure on real estate, commercial real estate and housing loans up to a maximum of 10 per cent of their total assets with an additional limit of 5 per cent of their total assets for housing loans up to ` 1.5 million. In order to facilitate enhanced priority sector lending, it is decided to permit UCBs to utilize the additional limit of 5 per cent of their total assets for granting housing loans up to 2.5 million, which is covered under the priority sector. The Damodaran Committee had observed that foreclosure charges levied by banks on prepayment of home loans were resented upon by home loan borrowers across the board, especially since banks were found to be hesitant in passing on the benefits of lower interest rates to the existing borrowers in a falling interest rate scenario. As such, foreclosure charges are seen as a restrictive practice deterring the borrowers from switching over to cheaper available source. It is felt that the removal of foreclosure charges/prepayment penalty on home loans will lead to a reduction in the discrimination between existing and new borrowers and the competition among banks will result in finer pricing of home loans with the floating rate. Though many banks have, in the recent past, voluntarily abolished the pre-payment penalties on their floating rate home loans, there is a need for ensuring uniformity across the banking system in this regard. Accordingly, it is proposed: not to permit banks to levy foreclosure charges/pre-payment penalties on home loans on a floating interest rate basis.
Arvind Chari, Fund Manager (DEBT), Quantum Asset Management Company:
We believe they have front loaded their overall rate cuts for the time being. This is a big sentiment booster and will help revive some investment sentiments. “It must be emphasized that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates” - a key statement indicating the limited headroom for further rate easing. RBI seems to have accepted the fact that – India’s non-inflationary growth trend is between 7% - 7.5% and seen in that light the need for aggressive rate cuts might not be warranted as base GDP growth is expected to come in the 7% - 7.5% band in FY 13. Further rate cuts will be completely dependent on oil prices falling and food prices stabilizing. 10 year bond yields have eased by 10 bps from yesterday close and currently trading at 8.35%. Further move will be dependent on impact of supply and on the trajectory of Brent Oil prices. If Brent Oil continues its current downward trend, bond yields can move down further. We see a reasonably wide band of 8.25% - 8.45% in the near term. Short term market rates will ease a bit more from  current levels as cost of funding falls by 50 bps and liquidity remains comfortable in Q1. The currency will draw strength from the positive sentiment; but movement will demand on global situation and pace and direction of capital flows. We expect banks to cut their base rates by 25 - 50 bps bringing relief to borrowers.
Dinesh Thakkar, CMD, Angel Broking:
The RBI’s move to cut the Repo rate by 50bps comes as a welcome surprise. The decline in average inflation levels by more than 150bps compared to the levels prevailing during most of FY2011 and FY2012 was clearly creating headroom for interest rates to come down and the RBI’s move mirrors these macro conditions. So, I would expect even broader lending and deposit rates to inch down by 50bps in the coming months, as lower inflation enables higher financial savings and improving liquidity conditions for banks. The RBI has appropriately also kept inflation within its radar in order to keep inflation expectations anchored pointing out that potential GDP growth is likely to be closer to 7.5%. So, I would conclude that the overall headroom for interest rates to come down is likely to be a moderate 75-100bps over the course of the year, which itself is a major positive for the overall corporate earnings growth outlook, especially for rate sensitive such as banks and infrastructure.
Chaitanya Pande, Head-Fixed Income, ICICI Prudential AMC:
RBI through its annual policy announcement today fired the first salvo leaving the ball in Government’s court. Surprising the market by higher than expected rate cut of 50 bps, the rate trajectory has now indeed taken a southward turn. The cut in rates has been higher than the consensus expectation of 25bps. This was on account of significant growth deceleration and manufacturing inflation having moderated significantly by March 2012. Given the prevailing comfortable liquidity situation, increasing the MSF to 2% is also a welcome step. RBI will be watchful of GOI moves on subsidies, petrol hikes and inflation numbers before it decides on any further rate cuts. Expect banks to cut their base rates soon and pass on the benefit to borrowers. Expect the yield curve to steepen. Supply pressure on G-Secs remains.
Aditya Birla Money:
As against the market expectations of 25 bps cut in Repo Rate, the RBI surprised the market with 50 bps cut. We believe the banks to pass on the rate cut partially to the end consumers thereby fuelling demand for credit going forward. However, the Central Bank signalled limited space for further reduction in policy rates going forward. The RBI said “The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate which, in turn, is contributing to a moderation in core inflation. However, it must be emphasized that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates”. On liquidity conditions the RBI indicated that appropriate and proactive steps will be taken, should the situation change which is currently around the comfort zone of the RBI. From equity market perspective, the RBI’s tone is slightly hawkish and we believe that the markets would largely be range bound in the short term. Upside, if any, would come from policy measures (containing subsidies and Government expenditure).
Shyam Srinivasan, MD & CEO, Federal Bank:
RBI has given a strong signal and the much needed impetus to the market with the repo rate cut of 50 bps. This front ending of interest rate cut is a bold move that should see confidence returning to the markets and lead to the virtuous investment/ capital formation cycle. The move should provide right fillip to the industry for going ahead with projects that were stuck on the drawing board. Though, RBI has guided that the ability to moderate further is low, we believe that the year could see at least two more rounds of rate cuts. Depending on the macro economic variables, there could be a cut in CRR as well.  The challenges on the domestic and overseas front remain. However, I believe that appropriate policy measures can reignite the growth cycle. The deposit and lending rates would come down, as a result of RBI’s policy action. RBI’s move to raise the borrowing limit of Banks under MSF from 1% to 2% will provide additional boost and improve liquidity conditions.
Mushtaq Ahmad, Chairman, Jammu & Kashmir Bank:
It is certainly a welcome step from the RBI to ensure more liquidity into the banking system through a repo rate cut. It will help banks like us, which have immense regional and pan-India lending opportunities. At J&K Bank, when we are expanding our corporate and SME loan book outside the J&K State, the rate cut scenario will allow us generate volumes, customer base and remain competitive. We will be happy to pass on the benefit of cut to borrowers.  Though seemed temporary, the initiative is an act of re-balancing towards checking inflation.
Harsh Pati Singhania, Director, JK Organisation:
RBI’s move to reduce policy rates by 50 basis points is welcome. It should provide impetus to growth by boosting consumption and investment. It shows RBI is concerned over slowing down of growth below post crisis trend rate. Therefore RBI seems to be taking corrective steps before it gets too late. One hopes that the banking sector will take a cue and reduce lending rates quickly so that the corporate sector is benefited by the policy.
Pradeep Jain, Chairman, Parsvnath Developers and CREDAI:
This was indeed a much awaited step from RBI which came after almost thirteen increases in last two years. A 50 bps cut in Repo Rate, bringing it to 8% is definitely going to boost the liquidity in market thereby clearing the supply side hurdles up to a significant level. As an after effect of the Union budget 2012-13, we were expecting a rate cut by RBI to ease out the liquidity crunch in the market. The revision of Wholesale Price Index inflation to 6.9% during March 2012 quarter from more than 9% during its preceding quarter also gave some liberty to RBI to go for the rate cut. For the real estate in particular, this is indeed a welcome step by RBI. While the sector was already reeling under the pressures of high interest rates, this will allow banks to lower down the interest rates significantly. Both buyers and developers shall get benefited from this. Also, RBI has removed prepayment penalty clause which is definitely going to cheer sentiments of buyers across sector. As a developer we foresee some better results ahead and thank RBI for considering the real issues of liquidity to this sector.
S M Lodha, CMD, Indsur Global:
The monetary policy review by RBI is a good breather and therefore is most welcome. The industry was reeling under heavy interest burden that was not only impacting expansion plans but also impacting the competitiveness of the industry in global markets. The present reduction of REPO rate would result into lowering the interest rates by Banks by at least twenty-five basis points. One of the good features of the policy is elimination of prepayment charges on home loans. This will have a good breather for middle class people.... a good step. It is hoped that in the next review RBI will consider a cut in CRR that will improve the liquidity.
Yadnesh Chavan, Fund Manager, Mirae Asset Global Investments:
Today’s rate cut of 50 bps is the first reduction in policy rates since 2009. The bigger than expected rate cut clearly indicates a shift in policy stance towards boosting growth in a flagging economy. However, at the same time the apex bank has raised concerns over the persistent upside risks to inflation which could limit the scope for further reduction in policy rates. From the statement issued by Reserve Bank of India it is clear that the magnitude and timing of further policy rate cuts would depend on the extent of fiscal consolidation, evolution of core and headline inflation (once base effect wears off) as well as crude & global commodity prices driven imported inflation.
(courtesy: myiris)
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