source:myiris
India’s Central Bank, the Reserve Bank of India (RBI) on Friday retained the short-term lending and borrowing rates inline with the expectations of the market participants. With this, the repo and reverse rates stand unchanged at 8.50% and 7.50%. Earlier on Oct. 25, 2011, the RBI raised the repo and reverse rates by 25% from 8.25% and 7.25%.
The collated views of experts on RBI monetary policy is as under:
Arun Singh, Senior Economist, Dun & Bradstreet India
In line with our expectations, the RBI has decided to pause in its interest rate cycle given that slowdown in the domestic growth momentum has become more pronounced with increased upside risks to the global growth prospects and a moderating trend in the domestic inflation. Though inflation, especially food, is witnessing a downward trend during the past few weeks, structural issues regarding the supply side bottlenecks still prevail. The RBI, which has to consider the impact of the rising borrowing costs on the growth momentum on one hand and the existing inflationary pressures in the economy on other, might not be able to accommodate monetary expansion in the near term. As a result, we expect the RBI to hold the policy rates at the present level till at least June 2012 before bringing it down.
YES Bank
Elevated levels of inflation will prompt the RBI to maintain status quo on policy rate in the third quarter review in January 2012. A faster than expected deterioration in growth will now prompt the RBI to start cutting policy rates from March 2012 onwards. We expect RBI to continue using OMOs to curb the excessive liquidity deficit; elevated levels of inflation will rule out the possibility of a cut in CRR in the near term.
Credit Suisse
Although this was in line with economists` expectations the small adverse market reaction suggests there were some betting on a move. We continue to expect the first repo rate cut to come in April or May, probably preceded by a Cash Reserve Ratio (CRR) reduction in March. With the RBI standing pat, the focus was on the statement and Governor Subbarao’s comments. Overall, it seems to us that the RBI’s tone has become more dovish, but fairly marginally so. Perhaps the most important comment came from the Governor himself who was quoted as saying that ’a rate cut is an event some way ahead’, suggesting, as usual, that it would depend on future growth and inflation developments. Looking ahead, we expect headline WPI inflation to fall further, while growth is likely to continue disappointing.
Nomura
We share the view on the near-term inflation trajectory with the RBI and believe that the rate-hiking cycle is over. We expect the RBI to start cutting policy rates in Q2 2012, as growth is likely to deteriorate in the next few quarters as suggested by our leading indicator.
On liquidity, the RBI sees no significant stresses at the moment, although it acknowledged that the liquidity deficit has been persistently above its comfort zone in the last few weeks, which is likely to cause it to continue to conduct open market operations to ease shortfalls in liquidity. By contrast, the RBI suggested that there is a possibility that it may take other strategic measures if the rupee depreciates further, citing its recent administrative measures to curb speculative activity.
Sudhakar Shanbhag, Chief Investment Officer, Kotak Mahindra Old Mutual Life Insurance
The no change in repo rate and CRR is largely in line with the market expectation, though the number of market participants expecting a CRR cut had gone up post the latest data on IIP and weekly inflation. RBI has reiterated that further rate hikes may not be warranted and reversal of the rate cycle will be in line with risks to growth.
Form a debt market perspective the overhang of supply and probable slippages in the fiscal deficit numbers are in consideration as also growth moderation which can impact long term interest rates. Measures of OMO have moderated long term interest rates and the yield curve at this stage is very flat with the 1 year to 10 year rates almost at the same levels. When the reversal of rate cycle will start the yield curve is expected to be steeper with corrections at the shorter end of the curve.
Form a debt market perspective the overhang of supply and probable slippages in the fiscal deficit numbers are in consideration as also growth moderation which can impact long term interest rates. Measures of OMO have moderated long term interest rates and the yield curve at this stage is very flat with the 1 year to 10 year rates almost at the same levels. When the reversal of rate cycle will start the yield curve is expected to be steeper with corrections at the shorter end of the curve.
The equity markets at this stage have largely discounted growth and earning moderations for FY13. Global developments are keeping the markets on its toes. Before the interest rate reversal is seen the positive hopes for the market would be from policy changes and FII flows.
Aneesh Srivastava, Chief Investment Officer, IDBI Federal Life Insurance
Tone of RBI is turning dovish. We expect that rate tightening cycle is over however it would take at least one more quarter for RBI to start any easing cycle, unless there is further sharp deterioration in global macroeconomic environment. We also expect that RBI would continue to use OMOs to infuse liquidity in the system.
Interest rates in economy are sensitive to RBI policy as well as government borrowing programme. We expect fiscal deficit to be around 5.6-5.8% of GDP and hence we do not expect a secular decline in yields from here on.
Dhawal Dalal, Senior Vice President and head - Fixed Income, DSP Black Rock
“By not changing any rates in the Credit Policy, the Reserve Bank of India has attempted to address both headline inflation, in particular sticky core inflation, and further weakening of economic growth prospects. Market participants have found the RBI’s statement dovish and therefore expect the RBI to cut rates by early next year. Till then, the RBI is likely to address structural liquidity through Open Market Operations as and when required.”
Moses Harding, Head, ALCO and Economic & Market Research, IndusInd Bank
RBI is expected to stay in pause mode till March 2012. The external sector is still vulnerable with the belief that worst is still ahead. RBI will stay prepared for reversal of rate hike cycle by Q1 of FY13 post March 2012 inflation and growth numbers. The downtrend in growth momentum and headline inflation below 7% would trigger CRR and/or rate cuts. The risk to this expectation will be on headline inflation remaining stubbornly over 7.5-8.0%. While there is clarity on downtrend in growth momentum into 7.0-6.5% by 2013; concerns on inflation continue to stay valid with mix of supply side issues and high input cost of imports. Over all, the worst for money market is already behind while timing of easing cycle is uncertain at this stage. The system continues to be on a ‘risk-off’ mode to divert investment flows into fixed income from other asset classes. There is hope of reaching the light at the end of the tunnel soon!
Chanda Kochhar, Managing Director & CEO, ICICI Bank
Today’s mid-quarter policy statement announced by the Reserve Bank of India was a realistic assessment of the prevailing macroeconomic situation. In line with its previous guidance, the central bank has not taken any action on policy rates. This is a positive step as growth has been moderating and inflation, though still above comfort levels, has started showing signs of easing. The mid-quarter policy statement has addressed the concerns on the interest rate side, by clearly indicating a likely reversal in the cycle with monetary policy actions being directed towards addressing growth related issues going forward. I believe that as a country we have huge opportunities and strong fundamentals that can drive sustainable growth, and a specific set of challenges we must address. Focused and coordinated policy action on these fronts would enhance confidence and move the economy back to a high growth path.
Kavi Arora, CEO, Religare Finvest
The RBI has kept the policy rates constant, which is line with market expectations and in continuation of the stance laid out during the previous monetary policy review. It is heartening to note that the RBI acknowledges the downside risk to growth, and seems poised for appropriate action when inflation rates moderate.
With this, it appears that the interest rate cycle has now peaked, and this in itself should provide some momentum to the economy as firms plan their future investments. As a leading SME-focussed NBFC, Religare stands ready to support our clients as they forge into the New Year.
With this, it appears that the interest rate cycle has now peaked, and this in itself should provide some momentum to the economy as firms plan their future investments. As a leading SME-focussed NBFC, Religare stands ready to support our clients as they forge into the New Year.
Devendra Kumar Pant, Director, Fitch Ratings
RBI’s action is on expected line. While sharp decline in second quarter economic growth was pointing for a rate cut, sustained high level of core inflation is a strong argument against rate cut. India being a net commodity importer should have been benefited from decline in commodity price and would have helped in cooling of inflation. Sharp depreciation of Indian rupee has in fact added to worries of RBI in its fight against inflation. Market liquidity condition during this time of year is always tight and RBI will manage liquidity by open market operations. While food price inflation dropped to four year low, a reversal of increasing trend of core inflation will be major determinant of reduction in policy rates.
Kislay Kanth, Senior Director, Research, MAPE Securities
We believe that the pause by RBI will not be enough to restore confidence in the cyclical sectors in India but the change in trend is welcome. The decision by RBI to leave everything unchanged is moderately negative on the overall market sentiments, because much was anticipated from this meeting. Only the recent interventions in INR currency markets is a moderate positive and we believe that the RBI should be little more proactive than what we saw over the last few months.
Siddharth Shankar, Director, KASSA Group
As expected the RBI did no change in its policy. RBI has shown its concern on the growth but inflation remains its major concern. While the inflation is falling the pace of its fall is quite slow. The non-inflation numbers still are showing no signs of a fall and the food inflation is falling due to the seasonal effect. The base effect will also make the numbers look better. But all this is not reflective of the falling inflation. Coupled with this is the fiscal deficit of the government. My view is that in the Jan RBI would not reduce the rates but may signal an easing by cutting the CRR. Once we have the budget in February RBI would have a clear picture on the fiscal front as also on the inflation front and going forward in RBI may look at easing of the monetary policy.
