How industry leaders reacted to RBI's monetary policy?

RBI maintained status quo on repo rate at 6% in its first bi-monthly policy review of 2018-19, as widely anticipated by the market.

Apr 05, 2018 01:04 IST India Infoline News Service

The Reserve Bank of India (RBI) has maintained a status quo on key repo rates at 6% under the liquidity adjustment facility (LAF). The reverse repo rate under the LAF remains at 5.75%, and the marginal standing facility (MSF) rate and bank rate at 6.25%. Five of six members voted in favour of the decision.

Following are the reactions by industry leaders on RBI’s monetary policy outcome:

Chanda Kochhar, MD & CEO, ICICI Bank said, “The significant positive in the monetary policy was the downward revision of inflation projections.  The MPC also recognized that the structural reforms undertaken by the Government and the pickup in credit growth are leading to a broad based cyclical improvement in the economy. The MPC has prudently voiced concerns about the possible interplay of domestic and global risk factors that could play out over the medium term. The announcement of regulatory measures like the mandatory loan component in working capital financing is a step in the right direction. Allowing non-residents into swap markets and introduction of Rupee swaptions would deepen the domestic derivative market, while also aiding product development to enable better risk management by domestic entities.”

Rana Kapoor, MD & CEO, YES Bank, “Despite sharp correction in food prices in the last two months, RBI's status quo in the annual policy review was anticipated. Ongoing normalization of interest rates in US, higher global crude oil prices, and the looming threat of escalation in global trade war warranted a cautious approach. The neutral stance is also justified by government's proposed recalibration of Minimum Support Prices to 1.5x the cost of production for the upcoming kharif season. I believe the growth baton is now firmly in Government's hands as it is actively facilitating the revival of private investments. Additionally, with improvement in momentum of the asset resolution process, growth appetite should get ploughed back.”

Rajni Thakur, Economist, RBL Bank, “RBI has decided to hold the key policy rates in the first Monetary policy decision for 2018-19.  While status quo on policy rates were on expected lines, the Goldilocks scenario that RBI has outlined for the new fiscal- with higher growth expectations and lower inflationary forecasts- could very well indicate rates on hold for the whole year. It will boost the general market sentiments and bond markets in particular. The fact that the committee has looked through the volatility episodes in financial market to balance the tightrope walk between rising global rates and nascent domestic growth reiterates its “data dependency” approach.”

Lakshmi Iyer, CIO- Debt & Head of Products, Kotak Mutual Fund, “The monetary policy committee delivered a status quo on expected lines. The surprise element was however a reduction in inflation (CPI) guidance, which also took the bond market by surprise. Hence, we saw a healthy rally in bond markets. Going forward focus would shift to global developments and its impact on global bond yields. Crude could be a big joker in the pack, which is a key determinant for bond yields as well. For now, we maintain that policy rates would be on an extended pause which could be supportive for bond prices. Fixed income investors could continue to stay invested in long duration funds, with fresh investments to be initiated into credit accrual/ short term based strategies.”

Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance, “As expected, the RBI kept policy rates unchanged and sounded dovish on inflation, with inflation estimates for H1 & H2 FY19 being cut. We expect the RBI to be on pause for some time, although future policy action will continue to depend on local and as well as global factors

Bond yields had fallen sharply after the announcement of the revised government borrowing programme for H1 FY19 in late March 2018, as the gross borrowing amount was lower than expectations, and the composition of the borrowing was also favourable as it was more tilted towards short to medium term dated securities.

We have been saying for a while that the market had priced in most of the risks, and that yields were elevated. With the recent fall in bond yields, we feel that yields will be range-bound in the near term. We prefer the shorter to medium term end of the yield curve presently.”

Radhika Rao, India Economist, DBS Bank, "The RBI backed its neutral stance by a downward revision to the inflation forecasts (excluding HRA), but expressed more conviction that GDP growth has bottomed out and is likely to gain momentum this year. Marking a notable shift from the Minutes of the February meeting – April’s tone was less cautious than markets anticipated, which might see swaps shake-out expectations of imminent policy tightening. On inflation, the June to December 2018 quarters are likely to distorted by statistical factors - base effects and fading impact of one-off catalysts same time last year, with a true underlying picture likely to emerge into 2019. We expect inflation to remain above target this year, but not test past the higher band i.e. 5-6% levels in a sustained fashion. Overall, today’s tone and direction prompts us to maintain our call for benchmark rates to be kept steady in 2018. Policymakers will nonetheless remain mindful of an increase in inflationary expectations on the back of MSP increases, high domestic fuel prices and global uncertainties (heightened trade war concerns, rupee volatility), keeping them on a balanced path." 

Kunal Shah, CFA, Fund Manager - Debt, Kotak Mahindra Life Insurance Limited, “The MPC maintained status quo on interest rates in its first Bi-Monthly policy for the year, the move was in line with our and market expectations. As we had expected, the policy guidance has been dovish compared to past stance. RBI has cut its inflation expectations for full year to 4.65% from 4.95% and sees growth reviving to 7.4% sighting investment rate revival.

The important and positive signal from the inflation expectations at 4.65% is that RBI may not be looking forward to hike rates anytime in next few quarters as repo rate stands at 6% giving real rates at 1.5%. The guidance will surely give lot of breather to hammered bond markets which will now see some revival in terms of risk appetite.

The bond yields have dropped by 60bps to 7.20% from the peak of 7.80% seen in Feb-March, and we believe 10y bonds will continue to trade in the range of 7.00-7.35% in near term. The marginal drop in inflation, normal monsoon, lower bond supply and mildly dovish policy stance will keep bond market buoyant in near term as valuations are reasonable.”

Niranjan Hiranandani, President NAREDCO, "The Reserve Bank of India’s (RBI’s) six-member monetary policy committee (MPC), headed by Governor Urjit Patel, remained firm on its neutral stance, which has been changed from the earlier stance of ‘accommodative’. The decision of maintaining ‘status quo’ on rates is consistent with the neutral stance of monetary policy, given the objective of achieving medium-term target for consumer price index (CPI) inflation of 4% within a band of plus/ minus 2 per cent, while supporting growth. The decision of the MPC was on expected lines, no surprise as RBI maintains ‘status quo’."

Amit Ruparel, Managing Director Ruparel Realty said, “Considering the focus on providing housing for all, especially in the affordable segment, it is surprising that the RBI decided not to lower the repo rate. A drop in repo rate would have significantly brought down costs for the home buyers which would have increased demand. The industry is dependent on various factors such as economic conditions, policies, demand among others, this calls for action on the policy front for the industry to set itself on the accelerated growth trajectory“.

Garima Kapoor, Economist, Elara Capital said, "In line with our expectation, MPC maintained status quo in today’s monetary policy. The recent softening in retail inflation that had firmed up during early months of winter, supported RBI’s decision to maintain status-quo. The recent moderation also supported a downward revision to RBI’s forecasts for FY19 CPI inflation. However, we expect headline CPI inflation to overshoot RBI’s forecast. We expect retail inflation to remain in the range of 4.7%-5.6% in H1 FY19 (vs. RBI’s forecast of 4.7%-5.1%) and 3.7%-5.0% in H2 FY19 (vs. RBI’s forecast of 4.4%). We believe factors such as the expected trajectory of food prices (following new formula for MSP revision), trend in crude oil and other commodity prices and outlook for South West Monsoon will remain key in determining policy trajectory. We expect one rate hike of 25 bps towards second half of FY19."

Pankaj Pathak - Fund Manager, Fixed Income, Quantum AMC,  "The RBI by lowering its inflation estimate for FY 19 has signaled a shift in its monetary policy outlook for the rest of the year. In the last 4 months, the RBI was seen to be hawkish and worried on the inflation trajectory.  But its language in the accompanying statement and during the press conference suggests to us that the RBI is not unduly worried about the oil prices and MSP increases. Market expectations of any rate hikes will be dialed back post this policy and hence bond yields will remain supported on the back of already announced reduction in bond supply in H1 FY19. We remain a bit surprised on the flip-flop of the RBI on its overall inflation projections and specifically its treatment of HRA allowance for its inflation projections and do have a feeling that the ‘dovishness/softness’ in its statements could well have been brought about by the need to manage bond yields and maintain the positive sentiment in the bond market."

Aditti Nayar, Principal Economist, ICRA said, The indicative calendar of market borrowings by state governments indicates a sharp rise in their planned gross issuance to Rs1.16-1.28 trillion in Q1 FY2019 from Rs0.65 trillion in Q1 FY2018. In ICRA's view, this spike is likely to represent a front-loading of the states' borrowing requirement, in light of the change in the GoI's issuance calendar, rather than a signal of a fiscal deterioration. The net borrowing of the GoI is set to decline by 13.7% to Rs2 trillion in H1 FY2019 from Rs2.3 trillion in H1 FY2018. In particular G-sec worth Rs714.4 billion are set to be redeemed in April 2018, while gross borrowings of only Rs480 billion have been planned for that month, indicating a net redemption of Rs234.4 billion.

Charanjit Attra, Partner, Financial Accounting Advisory Services (FAAS), EY India said, “The extension of one year would help the banks set up their IT infrastructure to meet up the requirements of Ind AS particularly for the computation of the expected credit loss. Banks should use this period to build robust processes for Ind AS adjustments.  However, Ind AS will still be applicable for NBFCs unless it is amended. The implementation of Ind AS for banks was expected to make the results more comparable globally . However, the extension of one year would give more time to the banks for making proper processes for implementing the complex changes under Ind AS.”

Sajal Gupta, Head Forex & Rates Edelweiss Securities said, “While RBI kept policy rate unchanged, it unexpectedly revised inflation forecast lower for FY19 which added impetus to bond and equity rally. We still see a possibility of rate hike in FY19 possibly towards the second half of the year based on materialisation of various upside risks. We do not expect major gains in bond market from here on and 10yr benchmark yield is unlikely to breach 7.10% in near term. For USDINR, policy turned out to be largely non-event with global events to have more bearing on exchange rate in our view. Our near term range of USDINR is 64.80-65.50 with major risk surrounding ongoing US-China stand off on tariffs imposition”.

Shilpa Mankar Ahluwalia, Partner, Shardul Amarchand Mangaldas said, "The RBI announced earlier today that all payment system operators, must, within 6 months, ensure that data related to any payment system it operates is locally stored. It is unclear at this stage whether this requirement will extend to only licensed entities (such as wallet issuers) or also apply to the payment gateways and intermediaries. A data localization requirement will have significant implications for global payment system players, many of whom are have centralized offshore data storage systems. Detailed rules are expected within a week."

Shailendra Kumar, CIO at Narnolia Securities, “RBI credit policy was in –line with market expectation in terms of maintaining status quo on policy rates. What made the policy eventful was sharp reduction in inflation forecast for FY19.   Though stance on policy rate was as anticipated given the backdrop of government assertion that both fiscal deficit and revenue shortfall in FY18 would be lower than revised budget estimate and that market borrowing would be only Rs 2.88 lakh crore in 1HFY19 as against Rs 3.72 lakh crore in 1HFY18. Falling food inflation was hinting at lower inflation as far as first half of FY19 is concerned but the way RBI has lowered inflation forecast for the full financial year 2018-19 hints that there would be a long pause in RBI policy rate and there would not be any rate raise this calendar year. Though we believe there remain three key uncertainties - fiscal deficit in FY19, inflation particularly food in second half and pace of normalization of US monetary policy. But today’s RBI policy surely soothes nerves of Indian investors in an immediate sense.  10 year bond yield falling by almost 2% today to 7.15% augurs very well for equity market. 10 year bond yield approaching 7.7% in February this year was one of the key trigger for sharp losses on Indian bourses. Now, falling bond yield should surely help earning multiple to increase. Nifty has already been in the process of bottoming out over last one month trading around its 200 day moving average. It surely will get a positive boost from today’s RBI policy. In the near term Nifty would be expected to trade in the range of 10000-10600 till clarity on corporate earnings growth in FY 19 emerges.”

Deepak Kapoor, President CREDAI-Western U.P. & Director, Gulshan Homz, "The decision of RBI to keep the rates unchanged is a clear indication that the apex bank wants to maintain its vigilant approach in the upcoming two months as well. A sufficient cushion needs to be kept for the economy with the start of a fresh financial year and the changes which will happen with REITs and InvITs expected to be operational soon."

Manoj Gaur, Vice President CREDAI-National & MD, Gaurs Group, "There is no rate cut in the latest monetary policy by RBI however, a parallel cut in repo rate and CRR would have brought a win-win situation for the banks. This would have allowed them to reduce the interest rates and keep the surplus funds simultaneously, further enhancing their lending capacities. The start of the financial year in such a way could have in that case become a big sentiment driver for the entire economy."

Gaurav Gupta, General Secretary, CREDAI Ghaziabad & Director, SG Estates, "The reduction in rates would have ultimately been advantageous to the customers for the reason that if banks have reduced rates, the same will apply to the end-borrowers too and real estate market will have a pool of demand to deal with. A rate cut of 25 bps could have helped ease the pressure off the market which has been balancing itself for over 6 months now. However, with no change offered in this monetary policy review, we expect the market to run with only a static demand in the short run."

Abhishek Bansal, Executive Director, Pacific Group, "In case of an economy dominated by low interest rates and having abundance of cash flow, the risk of inflation is greater. Hence, the decision of the RBI to not reduce the rates until it has been fully convinced about the inflation control is very justified. But as we have just began with the financial year, a rate cut today would have allowed potential buyers to plan better for their investments in the property market for the current financial year."

Vikas Bhasin, CMD, Saya Group, "Even though the apex bank has kept the rates unchanged, but we still believe that there is room for financial institutions to cut down on their lending rates for their customers. Prior to this, the last reduction was a 25 basis point cut in the key rates in the month of August 2017, the benefits of which are yet to be fully passed on to the customers. Also, as the Union Budget failed to bring cheer to the market, reduced rates today might have helped sooth the economy to some extent."

Dhiraj Jain, Director, Mahagun Group, "Looking at the market dynamics, we were projecting the RBI to maintain the status quo. Any reduction in lending rate allows the sentiments in real estate to improve as the net cost on the buyer for the housing unit gets decreased but with the market inflation not coming below the medium – term target and potential trade wars among more advanced economies of the world, the apex bank would have been compelled to maintain the status quo."

Prateek Agrawal, Business Head & CIO, ASK Investment Managers, “Keeping interest rates unchanged has been as per expectations. This along with the leeway given to banks to absorb loan losses (done over last few day) has provided fuel to the stock market. RBI has been conscious of lower inflation risk and uncertain global trade environment.” 

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