The Reserve Bank of India (RBI) on January 25 raised repo rate and reverse repo rate by 25 bps to 6.50% and 5.50% respectively in its monetary policy review. CRR has been kept unchanged at 6%.
ICRA (RATING AGENCY):
"With inflationary pressures returning to the forefront, the policy measures undertaken by the RBI were in line with expectations. With transient and structural factors imparting pressure to food inflation and higher commodity prices expected to percolate into prices of non food manufactured products, inflation is likely to decline at a moderate pace and remain the core policy concern for the RBI. In light of the broadly robust growth outlook supported by healthy advance tax collections and improved bank credit off-take, we expect that the RBI may persist with monetary tightening (including a further increase in policy rates by 25 basis points before end-March 2011), while maintaining systemic liquidity and interest rates at levels that can sustain economic growth".
Alok Sahu, Head of Fixed Income at Baroda Pioneer AMC:
ICRA (RATING AGENCY):
"With inflationary pressures returning to the forefront, the policy measures undertaken by the RBI were in line with expectations. With transient and structural factors imparting pressure to food inflation and higher commodity prices expected to percolate into prices of non food manufactured products, inflation is likely to decline at a moderate pace and remain the core policy concern for the RBI. In light of the broadly robust growth outlook supported by healthy advance tax collections and improved bank credit off-take, we expect that the RBI may persist with monetary tightening (including a further increase in policy rates by 25 basis points before end-March 2011), while maintaining systemic liquidity and interest rates at levels that can sustain economic growth".
Alok Sahu, Head of Fixed Income at Baroda Pioneer AMC:
"The stance of this monetary policy is to contain the spill over of high food and fuel inflation while maintaining an interest rate regime that is consistent with price and financial stability. The hike of only 25 bps in policy rates also gives it the flexibility to react to any further build up in inflationary pressures. In our view, the future policy stance would depend on inflation and inflationary expectation. We expect RBI to hike policy rates further by 50-75bps in FY`11. The short-term interest rates are at elevated levels due tight liquidity condition. We expect the short-term rates to remain volatile with bearish bias until March due to tight liquidity condition and higher supply of bank CDs. The 10-year yield is expected to remain volatile and trade in a narrow range of 8.1% to 8.25% in the near term".
Ramanathan K, CIO, ING Investment Management:
"The rate hikes of 25 bps on both repo and reverse repo were below my expectation of 50 bps hike in both, although the same was in line with consensus expectations. It is difficult to understand the rational behind baby steps now especially when the revision in inflation target for March ends from 5.5% to 7% is a significant increase. We continue to expect a further 75-100 bps increase during this calendar year. We believe that the fair LAF range considering 6-6.5% average inflation for next year on an average is between 7-8% and RBI is slowly but steadily moving to that range".
Sandesh Kirkire, CEO, Kotak Asset Management Company:
"The 25 bps hike in the repo and reverse repo rate by RBI was largely on expected lines. It is evident from the central banker`s policy statement that the role of monetary policy in the current inflationary situation is confined to containment and prevention of the food and energy prices from spilling over into the generalized inflation. We therefore believe that the monetary policy would continue in the path of gradual tightening without affecting growth".
Mahendra Jajoo, Executive Director & CIO, Fixed Income, Pramerica Mutual Fund:
"Hike in repo/reverse repo rates by 25 bps each is in line with broader market expectation. Upward revision of inflation projection to 7% does imply more rate hikes in subsequent policies. While inflation is currently due to food articles, RBI has mentioned the need to prevent filtering of the same into broader economy has an immediate priority".
Waqar Naqvi, CEO, Taurus Mutual Fund:
"The decision to increase the repo and reverse repo rate by 25 basis points was mostly in line with the broad market consensus. The rise is moderate enough to be non-disruptive to the growth process, yet its ability to contain the 'spill-over' effect of food and fuel price inflation may be tested in the future. Though RBI will certainly keep an Argus eye on the inflation number, it will also now need to remain vigilant on the current account deficit and its sustainability and likely impact on the interest rates/exchange rate dynamics".
Vijai Mantri, Managing Director & CEO, Pramerica Mutual Fund:
"RBI has revised upwards the inflation projection to 7%. As such, rates hikes are in line with the economic outlook. Inflation would continue to dominate the monetary policy and further rate hikes could be expected in March policy".
Sandeep Nanda, CIO, Bharti AXA Life Insurance:
"The Reserve Bank of India (RBI) continued with its measured approach to monetary tightening and hiked the policy rates by 25 bp, in line with our expectations. Since inflation remains well above the RBI`s comfort level further gradual hikes can be expected to anchor inflationary expectations. The recent upside surprise on inflation has been driven significantly by a spike in food and primary articles and may come off as short term factors fade. Thus we believe gradualism was the best approach and a sharp increase in rates was not warranted".
SP Prabhu, V President- Fixed Income Fund Management - IDBI Federal Life Insurance Co:
"The debt market was expecting a 25bps hike in the Repo Rate and the policy announcements has been in line with market expectations. However, concerns over inflation remain, particularly on the food price front. Given the limited amount of Government Borrowing Program ahead in the current financial year, the market is expected to consolidate around the current levels. We expect the 10 year yield to be in the range of 8.00% - 8.50% over the next few months.
The tight liquidity situation is a combination of large Government balances and robust credit off-take. The abnormally large Government balances problem is due to time mismatch in Government รข€˜s revenue and expenditure cycle and will self correct over the next couple of months. The structural problem on the liquidity front is that the growth in credit is 24% while deposit growth is slower at 16%. Banks will have to address the issue with a combination of aggressive deposit mobilization and higher deposit rates. The RBI decision to extend the 100bps regulatory forbearance on SLR till April will provide the much needed liquidity support to the market".
Aneesh Srivastava, CIO, IDBI Federal Life Insurance Co:
"In light of falling manufacturing growth and rising inflation and tight liquidity conditions, policy decision has opted for increasing Repo and Reverse Repo rate by 25 bps so as to control inflation and Provided incremental liquidity in system to support growth. Gradual increase in interest rates is perhaps the best approach to manage inflation without disrupting growth in current environment".
Vikram Kotak, CIO, Birla Sun Life Insurance:
"Amidst the challenges posed by the current domestic macroeconomic environment, RBI has rightly chosen to tread the middle path- neither being excessively hawkish nor too mild. We expect RBI to maintain a slightly hawkish stance going forward to do its bit to curb the spill-over effect of high food prices. Post this 25bps hike in policy rates, we expect it to further hike rates by a cumulative 50-75 bps in 2011 going forward and also keep liquidity in the deficit mode for at least next 5-6 months.
With inflation likely to remain high, averaging over 8% in FY11 and further 7% in FY12, there is a dire need for the government to tighten fiscal policy and improve the quality of its expenditure and execution capabilities to address the structural factors driving inflation. Monetary policy can have only a limited impact on inflation and aggressive tightening will, in fact, impede the recovery of the investment cycle thereby creating a worse combination of still-high inflation, no addition of fresh capacities and lower growth".
source: Iris
