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Expert views on RBI policy: Another 25bps hike in the repo rate to 8% by Mar 2014

The balance between inflation and growth continues to be as challenging. More repo hikes in near term cannot be ruled out with the central bank, according to experts

October 29, 2013 3:24 IST | India Infoline News Service
The RBI (Reserve Bank of India) in its Second-Quarter Review of Monetary Policy 2013-14 on Tuesday hiked the repo rate by 25 bps (basis points) to 7.75%. The central bank kept the CRR (cash reserve ratio) unchanged at 4%. 

The repo rate is the rate at which banks borrow from RBI and one basis point is equivalent to 0.01%. 

RBI Governor Raghuram Rajan, in his second policy review, has cut MSF (marginal standing facility) rate to 25 bps to 8.75%. The central bank expects GDP at 5% in FY13-14 and CPI to remain at or above 9%. WPI inflation is expected to remain higher than current levels and warranted "appropriate policy response", RBI added.

The decision to raise the repo rate by 25bps tries to balance rising inflation concerns with weaker growth, while the cut in the MSF rate – as INR volatility subsides – suggests that the RBI is gradually reversing the exceptional liquidity measures. The 100bp gap between the repo rate and the MSF rate has been reinstalled.

The second-quarter review of the monetary policy by the RBI was usually in line with market expectations. As most economists, analysts and industry experts had expected that the RBI would increase the repo rate by 25bps as both retail and wholesale inflation have gone up since August.

WPI inflation for September rose to a 7-month high of 6.5% YoY and CPI inflation also surged to a 3-month high of 9.8% YoY.

Chanda Kochhar, MD & CEO, ICICI Bank, said, "RBI’s continued move towards nomalising monetary policy operations, through reduction in the MSF rate and increase in the liquidity available through LAF, are welcome measures. The increase in the repo rate was along expected lines, given recent trends in inflation. As a country, we now need to focus on ways to revive growth and address supply-side causes of inflation."

According to Shailendra Bhandari, MD & CEO, ING Vysya Bank, the policy is fairly balanced, keeping in mind growth imperatives and inflation dynamics. The changes in the MSF and Repo rates were along expected lines, but what was reassuring was the neutral tone of the Policy, and the clear message that while Inflation is a concern, this will not be completely at the cost of Growth.

In order to assuage liquidity concerns at affordable rates to productive sectors, the RBI cut the marginal standing facility (MSF) rate by 25 bps, compressing the Repo-MSF corridor back to 100 bps, and also increased the magnitude eligible under term-repo by 0.25% of NDTL, Naresh Takkar, MD & CEO, ICRA, said.

Given the inflationary expectations for the rest of the year, RBI could increase the repo rate again by 25 bps during the second half but provide liquidity using other monetary tools at its disposal, Takkar said further. Echoing the same view, Normura said, We pencil in another 25bps hike in the repo rate to 8% by March 2014.


The RBI has lowered its growth projection, but still expects a modest recovery, led by better prospects in agriculture, signs of a revival in some services and an export revival. We expect growth to be much weaker – 4.2% y-o-y in FY14 against the RBI's 5% – as weak domestic demand offsets the tailwinds from better exports and agriculture, Nomura added.

Lakshmi Iyer, Sr. Vice President and Head, Fixed Income, Kotak Mutual Fund, said, “Despite a good kharif season, the money velocity in the agri-sector may be imposing a high price floor for the agri commodities. As a result, the inflation may not moderate in a hurry and may require further policy measures going ahead”.

Ajay Srinivasan, Chief Executive, Financial Services – Aditya Birla Group, said, According to the revised RBI policy, government borrowing costs of 1-3 year tenure should decline. The short term impact on the banking system's overnight borrowing costs is probably neutral, though costs should come down as liquidity conditions are further normalized.

The RBI seems to be adopting a multi-pronged approach of signaling higher repo rates to counter inflationary expectations, easier liquidity conditions to support growth and build-up in forex reserves to mitigate the macro-economic risks.


The key driver for lower food inflation would be the arrival of the new kharif crop, which is expected to temper food inflation. Minimum support prices have risen at a slower pace this year (about 4% average compared to 23% average last year) & a bumper crop could lead to control on runaway open market prices (for example in the case of vegetables), Axis Mutual Fund elaborated.

However the new crop will come to market over the coming months and would likely be reflected in price indices starting January. Thus RBI may hold off aggressive rate hikes until we get more data, Axis MF said.

Debopam Chaudhuri, (VP Research), ZyFin, said, “The balance between inflation and growth continues to be as challenging. More repo hikes in near term cannot be ruled out with the central bank viewing growth more as a function of prudent fiscal policy while continuing to target inflation.”

Pankaj Bansal, Director, M3M India, said, “Cut in MSF and hike in repo rate may result in further increasing the cost of funds for any industry or end consumers. Further dampening demand and industrial production. Demand for affordable and mid-end real estate projects may be adversely impacted due to a possible hike or adjustment in home loan rates. Expensive properties may not be negatively affected drastically as their demand is relatively inelastic and volumes not very large.”

Speaking about the development of the bond market, Vimal Bhandari, CEO & Managing Director, IndoStar Capital Finance, said that the RBI would allow banks to offer partial credit and liquidity enhancements. This is the first time such a move is being contemplated and is a welcome move, as India needs a robust bond market to complement bank financing. Once the guidelines are out there should be a fillip in bond issuances by the corporate sector.

The MSF rate cut and measures to ease liquidity will further ease rates in the short-end of the yield curve. As acknowledged by RBI, between mid-September and October, money market rates fell by 125 basis points. The latest cut together with liquidity easing measures would mean a price rally in short-term debt instruments for some more time, FundsIndia.com pointed out.

Going forward, with rate decisions hinging mainly on retail inflation, any rally in long-term gilt prices may be unlikely. It would be prudent for investors to avoid any fresh exposure to long-term gilt funds at this juncture, FundsIndia.com further said.

VS Parthasarathy, Group CIO, Mahindra & Mahindra, said, "A few interesting points in the policy print are note worthy like the allowance for partial credit enhancements for corporate bonds by banks, option for payment of interest at less than quarterly intervals on bank FDs and savings accounts.and inflation indexed NSS for individual savers. IThe proposed final guidelines on corporate unhedged forex exposures will ensure fairness to corporates and banks alike."

With inflation risks still tilted to the upside, RBI has to keep its inflation guards up and stand ready, if needed, to raise rates further to bring inflation under control. However, the RBI cannot do all of this alone and the government needs to chip in with structural reforms and fiscal consolidation, HSBC Global Research, said.


On real-estate industry

For the real estate, the upward revision in repo rate by the RBI is likely to increase pressure on real estate developers, who are already struggling to raise funds for construction amidst reduced lending from banks, Sachin Sandhir, MD, RICS South Asia, said.

From the consumers’ perspective, this revision will also affect the sentiments, as retail loans may become costlier. Because of subdued sentiments, sales have already dropped across regions. This will impact the new prospective buyers too, as uncertain economic conditions have made them cautious. As a result, these buyers are already taking longer time to decide on a particular investment, Sandhir stressed.







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