RBI Policy Review: Comments from industry experts

The MPC decided to continue with an accommodative stance as long as it is necessary to revive growth while ensuring that inflation remains within the target.

October 04, 2019 12:22 IST | India Infoline News Service
Reserve Bank of India
The RBI, in its bi-monthly policy review in October, has slashed the repo rate by 25bps to 5.15%. The reverse repo rate under the LAF stands reduced to 4.90%, and the marginal standing facility (MSF) rate and the Bank Rate to 5.40%.

The MPC decided to continue with an accommodative stance as long as it is necessary to revive growth while ensuring that inflation remains within the target. These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2% while supporting growth.

“The cut in Policy rates by 25 bps was on expected lines.  Reserve Bank of India continued its accommodative stance and both the fiscal and monetary policies are moving in tandem to spur/revive growth in the economy.  With inflation being within the target, the forward guidance remains accommodative to revive growth. We believe, the transmission of monetary policy rate changes will be faster now that Banks have already introduced Repo-linked Retail and MSE products and the rate cuts will be passed on to these borrowers.  With the busy and festive season having started, this rate cut will boost market sentiments. Overall, we expect the demand to improve and the main challenge now is to revive consumption-led recovery and spur private investments post tax corporate rate cuts.”
-Padmaja Chunduru, Managing Director & CEO of Indian Bank
‘At its fourth Bi-Monthly policy meeting, MPC cut policy rates by 25bps (5-1) and maintained the stance as accommodative, the 1 dissent vote was for 40bps rate cut. MPC also gave bold guidance by mentioning that “policy will remain accommodative as long as it is necessary to revive growth”.
MPC projects the CPI inflation in H2 2020 3.5-3.7% and Q1 2021 at 3.6% and on growth MPC has drastically cut the forecast to 6.1% from 6.9%, given the sharp cut in projections a 40bps cut in policy rate was warranted, probably the rise in household inflation expectations and falling efficacy of each rate cut played on MPC’s mind.  
Various estimates on growth are between 5.8%-6.3%, if the growth rate continues to disappoint MPC may reduce rates further by 15-25bps which probably will be terminal point in the current easing cycle. MPC will then focus on improving transmission by active liquidity management.
Bond market was already expecting a rate cut but got disappointed by less dovish commentary. 10y will trade in the range of 6.20%-6.60% in near term depending upon the developments on growth, oil prices and global monetary stance.’
-Kunal Shah, CFA, Fund Manager - Debt, Kotak Mahindra Life Insurance Co. Limited
“In the fourth bi-monthly monetary policy meeting, the RBI on expected lines, cut the repo rate by 25 bps to 5.15%. All the members of the MPC voted to reduce the repo rate. The RBI continued with the accommodative stance on the monetary policy as long as it is necessary to revive growth by reviving the aggregate demand. The real GDP growth projections for FY20 has been cut sharply from 6.9% earlier to 6.1% now, with a recovery in 2HFY20 (range: 6.6%-7.2%) with risks tilted to downside, while inflation forecast is more or less unchanged.
Multiple measures were announced to strengthen regulation and supervision; broaden and deepen financial markets; and improve the payment and settlement systems.
With rising output and increasing downside risk to growth, there is room for further monetary easing. However, the incremental quantum of rate cut could be limited after a cumulative rate cut of 135bps and given its weak transmission into lending rates that has a larger impact on real economy. Also, after the corporate tax cut and moderating GST collections, there is increasing risk of fiscal slippage on which RBI remains muted. The RBI did not explicitly mention on liquidity and the current stress in funding environment for NBFCs that has further unnerved the markets.”
-Rupen Rajguru, Executive Director, Head - Equity Investment & Strategy, Julius Baer India

“In line with broad market expectations, the RBI cut policy rates by 25 bps and retained its accommodative stance “as long as it is necessary to revive growth” with inflation being within the target range.

“RBI revised its GDP growth forecast for the current year from 6.9 % to 6.1 %. It also maintained the first quarter of 2020 CPI inflation forecast to 3.6 %. The Debt market was disappointed with the rate cut of 25 basis points in repo and reverse repo rates.  Purchase Manager Index (PMI) data in developed market has gone below 50 which indicates contraction in economic activity. As the monsoon has been good and oil prices are below 60 dollars per barrel. Growth Impulse in the domestic economy continues to be weak as credit market continues to be broken, corporate bond and G-sec spread continues to widen. There is little chance of CPI inflation going up and sustaining above 4 % due to these reasons. RBI has maintained it will continue with its accommodative monetary policy as long as CPI inflation remains below 4 % levels. We feel RBI may cut rates in the coming months by another 50 basis points as both domestic and international growth is weak and inflation expectations globally continues to be lower.”
-Murthy Nagarajan, Head-Fixed Income, Tata Mutual Fund

"Over the last 2 policy reviews, the RBI concerns on growth outlook have come into prominence. While the August review announced a nonstandard 35bps cut in policy rate, today’s policy statement reaffirms those concerns. The August review stated that addressing growth concerns assumes the highest priority. The MPC statement in October interestingly has provided a forward guidance with respect to maintaining an accommodative stance as long as necessary to revive growth. At the same time, the growth estimate for FY20 has been reduced by 80bps to 6.10% in a period of 2 months since August and Q1 FY21 estimate has been market down by 20bps to 7.20%. With high frequency data remaining weaker, it’s fair to expect further mark downs with respect to growth estimates. This is also borne by the MPC estimate that the negative output gap has widened further. Contained inflation estimates, much within the 4% target over a year ahead period, along with domestic and external headwinds to growth provide a positive backdrop to the bond markets from a fundamental perspective. Even as policy rates have been cut by 60 bps since August, the benchmark 10y bond yields have moved up by around 30bps since then. This has happened in an environment of contained inflation, weaker growth and a supportive global bond landscape in terms of incremental monetary accommodation from global central banks. Fixed income markets have remained concerned on the fiscal situation even as the RBI remains confident of government estimates on maintaining the fiscal deficit targets. Improving liquidity has kept the possibility of larger RBI OMO support remote at this point, as the markets search for an incremental buyer for expected additional bond supply. While tax revenue buoyancy may be elusive in the short term, aggressive non tax revenue mop up may need to be demonstrated at the earliest to assuage market concerns. At the same time, the cumulative transmission of the 110bps rate cuts prior to today’s action has been only around 29bps on fresh bank loan rates. Overall considering the forceful stated policy priority to reviving growth, given that inflation estimates remain comfortable, policy actions need to address the issue of transmission both in the bond and loan markets. Addressing dislocation in credit markets along with creating an enabling environment for more efficient policy rate transmission remains crucial for policy rate cuts to filter through to the real economy. Even as macro challenges facing the economy cannot be addressed by monetary policy alone, given the extant growth - Inflation outlook and cyclical / structural factors impacting growth, the current easing phase can sustain for a while even as liquidity conditions may remain conducive for rates transmission."
-Mr. Rajeev Radhakrishnan, Head of Fixed Income & Fund Manager, SBI Mutual Fund

“MPC has yet again exemplified its proactiveness by complementing the fiscal initiatives of the government with monetary policy easing in order to more effectively revive the economy. MPC’s emphasis on maintaining the accommodative stance as long as it’s imperative to resuscitate the growth; rightly sets the stage for more rate cuts in the future. Albeit the policy could have been more appealing with some counter-cyclical measures.  While the MPC has delivered with a long series of rate cuts, ensuring policy efficacy in terms of transmission in lending rates and pick up in growth should be the way forward”.
-Ms. Jyoti Vaswani, Chief Investment Officer, Future Generali India Life Insurance

In India, growth contracted sharply in both Q1 & Q2 and RBI has revised GDP growth estimates for FY’ 19-20 to 6.1% from 6.9%. It is widely expected that the fiscal stimulus provided by the government by way of a cut in corporate taxes and monetary policy initiatives on liquidity and lower rates should revive consumer confidence and consumption growth. The current quarter festive season is critical from a consumption demand revival standpoint and further monetary policy action will depend on the impact of the twin benefits of fiscal and monetary policies on demand and growth.” 
- Shanti Ekambaram, President – Consumer Banking, Kotak Mahindra Bank Ltd

As per market expectations, the Monetary Policy Committee (MPC) reduced repo rate by 25bps to 5.15%, bringing the total reduction to 135 bps in 2019. The MPC sited continued global malaise, trade wars, sharp reduction in India GDP growth rate, benign oil prices and subdued inflation to continue with the accommodative policy. The MPC further noted that the output gap has widened further and inflation still remains within policy target and hence the committee is likely to continue with accommodative policy to support economic growth keeping inflation target in mind. The policy did not comment on fiscal slippage post corporate tax rate cut, but in the post-policy conference, the Governor opined that there was no reason to doubt government’s fiscal aim.
Markets sold off post policy, as markets had already discounted a 25bps rate cut. Some market participants were expecting a steeper rate cut of 40 bps (post an unconventional 35bps cut in Aug’19 policy), but their hopes were belied. Further the Governor himself voted for 25bps rate cut. The market is well aware of fiscal risks emanating from steep corporate tax rate cuts and drop in GST tax collections. Despite the bonanza of Rs.1.72 lac crores in form of RBI dividend, the general consensus is of slippage of 0.5-0.7% in the fiscal deficit. While the government has not increased the borrowing amount for 2HFY2020, there is indication that they would review the situation in Dec’19. For that reason, the current borrowing calendar finishes in Jan’20, leaving Feb/Mar’20 for the extra borrowing required. This uncertainty is likely to keep markets on tender-hooks.  
Inflation in 2nd half is also likely to creep towards 4% (on back of higher food prices as well as oil price volatility), which may pressure bond markets. With liquidity remaining in excess, hopes of open market purchases have further dwindled. We expect 10Y (new) to remain in range of 6.40-6.60% in near term with upward bias.
- Avnish Jain Head - Fixed Income Canara Robeco Asset Management Company.

“The sustained accommodative stance of the RBI is good for growth, especially for the residential real estate sector. Clearly, the benign inflation has given a greater scope for the bank to go for a revival of the economy. We hope that banks will now accelerate the transmission of the RBI rate cuts to the common man to improve the demand and consumption across all sectors. The 5th consecutive rate cut has definitely sent a strong signal for the real estate sector to expect growth in sales at the onset of a busy festive season.”
- Kamal Khetan, Chairman and Managing Director, Sunteck Realty Limited

Today’s rate cut of 25 bps by the RBI was short of our expectation of a front loaded cut of 40 bps amidst sharp downside revision of FY20 GDP growth forecast from 6.9% to 6.1%, which is reflective of further widening of the negative output gap. Basis the surplus monsoon outturn and numerous steps taken by the government in the recent past to revive growth, the MPC seems to have taken a calibrated view on incremental monetary accommodation. However, with CPI inflation projected to remain under 4% in the near to medium term, it is a welcome sign that the MPC has now decided to maintain accommodative policy stance “as long as it is necessary to revive growth”. This in my opinion should keep the door open for further rate cuts in the coming months.
- Shubhada Rao, Chief Economist, Yes Bank

The RBI MPC voted for 25 bps repos rate cut. It also remained committed to maintaining accommodative stance that aids growth-revival to the extent needed. The tone seems tilted towards a softening bias. With the intent to maintain adequate liquidity in the banking system, bond yields could remain well anchored. This is conducive especially for short end of the yield curve. Global factors will assume centre stage now, which will determine near term movements in the yield.
- Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company

With the festive season round the corner, we definitely welcome this move as people make huge purchases during Navratras and Diwali. The real estate sector has been looking forward to such initiatives to boost sales as it is highly sensitive to interest rate movements. This further reduction of repo rate will not only bring down the lending rates but also incentivise investment and boost consumption. The government has already announced a series of measures including steepest cut in corporate tax amongst others to jump-start growth and revive the sagging economy. The year has been good so far with lot of policy measures being taken by the government. A wave of next gen reforms has set the stage for years of high growth for the real estate sector. However, the growth trajectory of the real estate sector will depend on the successive transmission of rate cuts to the end consumers. We are already witnessing an increase in the number of enquires too ahead of the festival. Real estate is a safe investment that will definitely give good appreciation and returns in a long term. Overall, it is not only the festive spirit, but also the market momentum that is poised to be in favour of the home-buyers. So, one must take advantage of the current scenario and invest with a long term perspective to ensure superior returns.
- Surendra Hiranandani, Chairman and Managing Director, House of Hiranandani

With the sharply lower GDP print of 5.0% in Q1FY20 and the continuing accommodative monetary policy of RBI in the face of global headwinds, a 25 bps rate cut was clearly expected. We believe that there may be room for further rate cuts in the current year given the slowdown concerns as reflected by a sharp revision of GDP growth estimates by RBI to 6.1% from the earlier 6.9%. However, Acuité believes that the steps being taken by the government to boost demand along with a good monsoon and increased FII and FDI flows should lead to a healthy revival in growth in H2FY20. We nevertheless, remain cautious on the upward risks to core inflation in the second half due to the ongoing monetary and partly fiscal expansion. Further, RBI’s decision to allow higher individual limits for MFI borrowings signals its intent to support a growth in the NBFC-MFI sector and boost lending for economically productive activities.
– Karan Mehrishi, Lead Economist, Acuité Ratings & Research Ltd.

The RBI's decision to cut the repo rate for the fifth consecutive time this year, by 0.25%, to 5.15%, is in line with industry expectations and shows its decision to maintain an accommodative stance. While this rate cut would bring down the borrowing costs for home and auto loans since the RBI has mandated banks to link their retail loans like home, auto, to the external benchmarks like repo rates, the success of these rate cuts will depend on how effectively they are transmitted to the home loan borrowers. Combined with the government's decision to create a Rs20,000 stress fund for the real estate sector and the festive period, this move will go a long way in improving sentiments, and hopefully, give a boost to consumer spending which is the need of the hour, to reboot the economy.
- Mani Rangarajan, Group Chief Operating Officer- Housing.com, Proptiger.com, Makaan.com and FastFox.com

The 25 bps rate cut in the October 2019 policy review is in line with our expectations, with the broad-based and sharp slowdown in economic growth momentum remaining the key focus amidst a relatively benign inflation outlook. The substantial cut in the GDP growth forecast for FY2020 underscores the extent of the growth slowdown, and the limited likelihood of an immediate revival despite the cumulative 135 bps of monetary easing undertaken by the MPC in 2019 as well as the measures announced by the Government. The MPC's decision to retain the accommodative stance for as long as necessary to revive growth, is a strong signal that further rate cuts are not off the table. The upcoming GDP growth print for Q2 FY20 is likely to crucially influence whether a sixth consecutive rate cut is announced in the December 2019 policy review, as well as the magnitude of the reduction.
- Aditi Nayar, Principal economist, ICRA Ltd

MPC policy delivered the conventional 25bps policy rate cut as against our expectations of a tad deeper cuts. However, the tone of the policy was comfortably dovish as the policy makers stated that MPC would continue with an accommodative stance as long as it is necessary to revive growth. The policy action in October comes at the back of further sharp growth downgrade by RBI to 6.1% (6.9% earlier) amid widening output gap, while inflation appears to remain sub 4% until 1QFY21. Despite significant 80bps cuts in growth forecast, the RBI justified the less deeper cuts in October by stating that they would like to see the impact on domestic demand of the economy on the back of (1) the impact of transmission of 135bps cuts in this cycle, and (2) the impact of recent tax cuts. That said, the overall statement continued to hint at further cuts ahead and focus on comfortable liquidity and rate cut transmission. We think that the economy needs a state of coordinated fiscal and monetary policy response. The output gap remains significant and the near-term growth impact are unlikely to be solely triggered through tax cut measures. The tax multiplier to growth at aggregate level has been statistically proven as modest. Besides, we note the government has optically maintained its pro-cyclical fiscal stance for now, as reflected in the 2H borrowing calendar. The RBI governor also reckoned that in the press conference that at this point, there is no reason for them to believe that centre would slip from its fiscal consolidation path. We reckon the global monetary stance has turned extremely accommodative in recent months. Since 3QCY19, around 20 central banks have cut rates as a global policy response to the threat from slowdown and as idiosyncrasies-led drags gathered steam. This gives further leeway to RBI to cut as India’s relative real rates remain high. With inflation at sub 4% in foreseeable future and widening output gap, we continue to see rate cut cycle extending beyond October by another 50-65bps+, depending on the incoming data ahead.
- Madhavi Arora, Economist, Fx & Rates, Edelweiss Securities

RBI has reduced the interest rate by 0.25%, totalling about 1.35% since February 2019 one of the fasted rate cuts in the recent history. This is in line with the govt motives to urgently revive growth. Lowering cost of money would certainly budge corporates to take risk and expand driving capex in the economy. The MPC was expected to reduce the interest rates given the global fragile environment and slowdown in domestic economy. For stock markets this will be non-event from a short term point of view.
- Jimeet Modi, Founder & CEO at Samco Securities

MPC delivered yet another 25bps rate cut, bringing the cumulative reduction in interest rate of 135bps for this calendar year. Concerns on the fiscal side on account of lower GST revenues and corporate tax cuts possibly dissuaded RBI from a steeper rate cut. Nevertheless, accommodative policy action from the central bank is quite expected given the deceleration in frequency indicators and protracted slowdown in private consumption. The need of the hour is to revive the economy. On inflation, RBI continues to see CPI well below 4% till Q1FY21 in the wake of widening negative output gap and benign core price pressure. On growth, GDP projections for FY20 is significantly downgraded to 6.1% from the earlier estimate of 6.9%, which was quite expected. In terms of future policy action, there is certainly scope for further rate move given the weak domestic demand conditions accompanied with contained inflation trajectory. We believe there is a possibility of another 15 to 30bps further cut. On the bond markets, while we do not rule out the possibility of yields rising somewhat, but eventually we see them headed lower. Although there is a concern regarding fiscal slippage, we sense that markets have largely baked in the fact that fiscal deficit will widen to 3.7-3.8% of GDP. We see interest rates falling significantly, looking at high real rates and scope for fall in credit spread as well as term premium. Moreover, policy transmission will eventually take place, which has not been yet materialized optimally. We see 10-year yields in the range of 6.3-6.7%.
- Amar Ambani, Head of Research – Institutional Equities at YES Securities

The Reserve Bank of India’s decision to reduce repo rate by 0.25% bps is a step in the right direction. This accommodative stance will help in stirring demand among homebuyers. With festive season beginning, this decision has come at a right time. Today’s announcement will help in boosting consumption, in the existing scenario when there’s an economic slowdown. RBI’s recent mandate on directly linking repo rate with fresh home loan rate was much needed to ensure immediate transmission of rate cut. After RBI’s decision, we request the government to take necessary steps to create housing demand across segments in this slowed economy.
- Chintan Sheth, Director of Ashwin Sheth Group

The rate cut is on expected lines given fiscal deficit concerns. The RBI language is extremely dovish, indicating further rate cut going ahead. On the whole, it was a robust policy from RBI and the correction in equity market could be due to expectations of 40bps rate cut. Only change I see is governor Shaktikanta Das ensures that transmission of rate cut will go through. If he does see bond yields going up, fiscal deficit is large, then he will do open market operations so that bond market will do behave correctly.
- Ananth Narayan, Professor at SPJIMR

The RBI has for the fifth time in a row slashed repo rates post the appointment of the new governor. The total rate cut by the RBI including today is 135 bps but the same has not been transmitted by the banks to the public due to blockage of funds. The governor has lowered the GDP rate for FY20 to 6.1% but quoted above 7% GDP rate for Q4FY20. We believe without the transmission of interest rates the probability of achieving GDP number above 7% looks slim. This indicates more measures from the fiscal end at the cost of the fiscal deficit which again is not a healthy sign. The need of the hour is to transmit the rate cuts to public, otherwise it will lead to the futility of all the efforts taken unanimously by the fiscal and the monetary policy.
- Foram Parekh, Fundamental Analyst, Indiabulls Ventures ltd.

"In the backdrop of the measures taken by the government and central bank to drive structural changes in the economy and increase cash inflow, another repo rate cut of 25bps adds to the much needed respite. These collective measures can be seen as a build-up to complement the government’s fiscal stimulus. However, for the common man to get the benefits of these cuts, it is highly important that banks ease the challenges for NBFCs to get funding from them, eventually pushing consumer sentiments. Also, with the festive season approaching, it becomes imperative for the banks to show willingness to remain flexible until economic conditions improve and customer spending intensifies."
- Thomas John Muthoot, CMD, Muthoot Pappachan Group

"The Repo rate cut of 25 basis points, is the fifth in a row rate cut by the Reserve Bank of India and takes the overall reduction of interest rates to 135 bps. The rate cut is expected to complement other fiscal measures such as the corporate tax rate cut that was announced last month to propel GDP growth.  The timing of the cut is crucial as it is expected to spur real estate demand and consumption ahead of the festive season as it is an important period for investment/ consumption across sectors. While the RBI has done its bit, it is now critical that banks facilitate a faster transmission of these rate cuts to ensure that the measures reap results.”
-Anshuman Magazine, Chairman & CEO, India, South East Asia, Middle East & Africa, CBRE

"The big takeaway from the extremely accommodative monetary is that the central bank and the government are in sync on the policy response to revive growth. The MPC’s view is that there is further policy space for accommodation to revive growth clearly indicates that more rate cuts are in the offing. Eventually the repo rate is likely to settle at 4.75% in this rate cut cycle. This is good news for the markets even though the markets are concerned about the issues in the NBFC and housing finance space".
- VK Vijayakumar Chief Investment Strategist at Geojit Financial Services

A 25 bp rate cut disappoints slightly. The market was firming up in anticipation of a significant cut since the morning, as was the Rupee. 25 bps will neither significantly bump up consumption nor investment. The MPC needs to be more aggressive to give a proper push to growth. Unfortunately, this was another opportunity foregone for now.
- Dr. Ranjan Chakravarty- Product Strategist at Metropolitan Stock Exchange

In line with the government’s efforts to revive growth in the economy, the RBI has lowered the repo rate to a record level. This further reduction of repo rate is a much needed and encouraging move and will propel the Indian real estate industry into a recovery drive in the near future. It will now definitely be a buoyant festive season for the sector. This move will ease liquidity and leave more money in the hands of home buyers. Despite the reduction in repo rates by the RBI in the previous reviews, it did not have any significant impact on lending rates. We now hope that the current rate cut would translate into lower EMIs and help soften home loan rates and also boost sales. Lower interest rates, along with other positive reforms announced recently will provide the fillip to end user demand.  Since the current and the future market is promising for the end user, such financial decision will help the end user take a decision with the lowering of interest rates. This will also bring back fence-sitters who were waiting for the perfect opportunity to invest in their dream home. Overall, this is going to have a positive impact on the housing market and we expect sales and launches to gain further momentum in the near future.
-Kiran John, Joint Managing Director of Terapact

“The announcement is in line with the objective to revive the economy. Whilst liquidity concerns are almost taken care by the central bank for NBFC, the continuous cut in the repo rate provide more monetary stimulus. It will be beneficial for the end-customer during the onset of busy festive season.”
-Mr Rajesh Sharma, Managing Director, Capri Global Capital Limited

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