Tuesday, October 17, 2017

RBI cuts repo rate by 25 basis points

In line with expectations, the central bank reduced rates to an all time low since 2010

By Rounak Kumar Gunjan

The RBI in its third monetary policy review for the current financial year slashed the repo rate by 25 basis points (bps) to 6%. The apex bank on Wednesday reduced rates to the lowest since November 2010.

For those who’ve joined in late, repo rate is the rate at which the central bank lends short-term money to banks which was earlier pegged at 6.25%.

RBI's move comes in the backdrop of inflation running well below its target for consecutive quarters. The central bank had last cut key rates in October 2016.

Weak consumer spending following the Narendra Modi led government's ban on high-value currency notes of Rs 500 and Rs 1,000 denomination late last year as well as lower food prices have kept inflation below the RBI's 4% mid-term target for the past eight months.

Govind Sankaranarayanan, Chief Operating Officer of Retail Business & Housing Finance, Tata Capital says, “The RBI’s change in stance from a ‘neutral’ to a cautiously ‘accommodative’ one seems to be predicated by an overall healthy monsoon, a decline in the inflation rate & a visible contraction in the manufacturing activity of the country – the first since demonetization. Credit growth has also remained sluggish for a few quarters and the rate cut should aid retail borrowers across auto, white goods and especially the affordable housing sector, which would benefit us as an NBFC. We welcome the stance taken by RBI and given the macro economic climate, we expect a further rate cut in the future.”

Speaking on the same matter, Mihir Vora- Director and Chief Investment Officer at Max Life Insurance, "The RBI cut the policy rates by 25 bps from 6.25% to 6%. This was as per our and market’s expectations." RBI continues to be data-dependent and the 4% medium-term inflation target remains.

Versus the last policy, RBI recognizes that growth, industrial production and private capex are very sluggish, indicating weakness. It thus looks like growth may be a more important concern in future policy decisions. We believe that inflation will be well within the RBI’s comfort zone and in our view, growth in capex will likely remain elusive because of a host of factors. Thus one more rate cut in the next two to three quarters is likely."

“The RBI as widely expected cut the Repo rate by 25 bps to 6%. The 5-1 voting in favor of a rate cut also suggests that the decision was almost unanimous.

The trend down in inflation in the last 4 months did indeed create some room and the RBI has seized that chance.

We may have just seen the last rate cut in this cycle and the RBI is likely to keep rate on hold for some months as we expect CPI to rise above the 4% mark by Q1 2018,” said Arvind Chari from Quantum Fixed Income Team.

Radhika Rao, India Economist, DBS Bank while commenting on the rate cut said, “The RBI eased policy rates by 25bp, along expectations but the decision was not unanimous. Accompanying rhetoric is largely neutral, without giving away particular bias for the rate trajectory. The latter will allow the RBI to be non-committal on the future course of action, retaining the flexibility to react to the evolving inflation trajectory. We reckon that the central bank remains fixated on the inflation outlook, rightly so given its central mandate, rather than being burdened by other considerations, which includes supporting growth and financial stability. Looking ahead, event risks are aplenty, but the disinflationary pressures in core inflation and ongoing structural corrective steps in food management suggest inflation is likely to stabilize around 4.0% from two to three quarters from now. Today’s policy statement is not a game-changer for the markets, with a neutral central bank to keep interest rate differentials in favour of the economy and thereby fueling foreign investor interests. One needs to differentiate between liquidity management and the rate direction, which might over the course of the coming months move in opposite directions. Whilst rates might be lowered in response to benign inflation, liquidity might continue to be drained to ensure the operating rate target is close to the policy rate.”

Nagarajan Murthy, Head-Fixed Income, Tata Asset Management speaking on the monetory policy review said, “RBI has cut policy rates by 25 basis points and maintained its neutral stance on policy rates. RBI has acknowledged the low capacity utilization in the industrial sector, actual CPI inflation undershooting its baseline forecast. However, RBI has reiterated its concerns on farm loan waiver which could reduce the capital expenditure of state governments; rural demand increasing in the coming months due to good monsoon which could led to higher inflation. As per RBI projections, CPI inflation is expected to be around 4 % in the March 2018 excluding the effect of increase in HRA of central government employees.

We feel RBI is conservative in its assessment of macro-economic factors. We expect CPI inflation to be below 4 % levels due to continuous deflation in the global economy which should keep commodity prices low. Good monsoon should keep food inflation under check. This may create room for RBI to further cut policy rates in this year. Accordingly, we expect 10 year Government bond yields to trade between 6.30 % to 6.45 % in the coming months.”

Kunal Shah, CFA, Fund Manager - Debt, Kotak Mahindra Old Mutual Life Insurance Limited when talking on the same mater said, “The rate cut of 25bps by MPC is on expected lines. MPC though has maintained the neutral stance on policy front as the inflation trajectory is still seen as blurred between structural and transitory factors at play. The sharp drop in June inflation to 1.5% and core inflation 3.9% has prompted the rate cut. MPC will probably take note of developments in inflation post HRA and GST related impacts materialize.

MPC has maintained the forecast on growth at 7.3% and year end inflation estimates at above 4%. RBI believes there is the urgent need to revive private investments and remove infrastructure bottlenecks through collective efforts from Government and the central bank.

Bond market got what was expected in the form of lower policy rate and bond yields should now enter into a consolidation mode. Markets will be watchful of inflation development, evolving monetary conditions in developed markets & OMOs for future cues. 10y bond yields will trade in the range of 6.30-6.60% in near term.

We believe the neutral stance will give RBI the chance to reduce rates by another 25bps if inflation trajectory remains benign (barring some spikes in vegetable prices) at less than 4% mark for next 6-9 months or the next easing may come if growth doesn’t bounce back as RBI still estimates GVA growth at 7.3%. On the other hand, the neutral stance will enable RBI to remain on a long pause till the time inflation remains around 4% mark".

Lakshmi Iyer, CIO (Debt) & Head – Products, Kotak Mutual Fund expressing her opinion said, “The 25 bps repo rate cut was on expected lines. The market has largely discounted this action and focus would now shift to global events and how they unfold going forward. The CPI target has been maintained for FY 2018. If CPI continues its softening trend, we believe case for an additional 25 bps remains live before end FY 18. Duration investors are advised to remain invested with the funds. Incremental allocation can be made into credit accrual funds and short term funds”.

rounak@outlookindia.com

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