India’s Central Bank, the Reserve Bank of India (RBI) in its monetary
policy review on
Tuesday has cut repo and reverse rate by 50 bps to 8% and 7% respectively. It
has kept CRR unchanged at 4.75%. The bank rate has
also been reduced by 50 bps to 9% with immediate effect. The marginal standing
facility (MSF) rate reduced by 50 bps to 9%.
The following are expert views on today’s
RBI Monetary Policy:
Arun Singh, Sr. Economist, D&B
India:
Slowing down of growth momentum amidst inflationary pressures does call for a cautious manoeuvring
of the policy rates as prevailing elevated interest rates is now regarded as
one of the major impediments for growth. The RBI has however, in an unexpected
move cut the repo rate by
a 50 bps points citing concerns of growth slowing down below its post-crisis
trend rate. Cutting the policy rate at a time when
inflationary expectations are
quite high given the incomplete pass-through of the global oil prices, rupee
depreciation and the uptrend witnessed in the food prices could fuel
inflationary pressures further.
Though the core inflation
has witnessed some abatement, further rise in food prices has the potential to
feed through into core inflation going ahead. As the upside risk to the
headline inflation loom large, it leaves little scope for the Central Bank to
further ease the policy rates at least in the near term.
Rohini Malkani, Economist, Citi India:
While acknowledging the slowdown in
growth, a key point to note is that the RBI has clearly stated that as the
deviation of growth from trend is modest, upside risks to inflation persist.
This limits the space for further reduction in policy rates`. Moreover, it has
highlighted that the economy is likely to revert close to its post-crisis trend
in FY13, which does not leave much room for monetary
policy easing without aggravating
inflation risks. Taking into account our FY13 expectations for growth and inflation at 7% and
7.4%, we could see at best one more rate easing later this year. However this
will be data/event-dependent, with key variables to watch being (a) measures to
meet the subsidy cap of 2%, (b) pass-through of oil prices, and (c) growth and
inflation out turns. Upcoming policy reviews are on June 18 and July 31. The
higher-than-expected rate cut resulted in the 10y benchmark bond yield 10bps
lower on the day at 8.35%. Today’s rate cut, coupled with moral suasion, could
result in banks lowering their lending rates.
Sonal Varma, Analyst, Nomura India:
The RBI’s forward guidance is more
cautious, and indicated that lower potential growth and upside risks to
inflation inherently limit the space for further reduction in policy rates. The
RBI has front-loaded its rate cuts, which is prudent, given lags in policy
transmission. We expect the RBI to remain on hold in June and most likely in
July as well. We expect one more repo
rate cut of 25bp this year. Contrary
to market and our expectations of a 25bp cut, the RBI today surprised
by cutting the repo rate by 50bp to 8.00%, in order to support
growth. The cash reserve ratio was left unchanged at 4.75%. We believe the
larger-than-expected repo rate cut was driven by four considerations:
(1) To send a strong signal (and leave no ambiguity) that
the RBI wants banks to lower lending rates;
(2) An impending fuel price hike and an increase in core
inflation from next month, which will limit the RBI’s ability to act in the
near future;
(3) The trend of declining growth rates that needs to be
reversed by boosting investments; and
(4) The sharp fall in core inflation.
Dipen Shah, Head of Fundamental
Research, Kotak Securities:
The RBI has cut rates by 50bps in surprise
move. CRR has been left unchanged, as expected. We believe that, the RBI has
not assumed any fuel price increase while setting these targets. So, if these
price increases do come, the targets for inflation and GDP growth might change.
And, the RBI has clearly stated that, the fuel price increase is a
pre-requisite for future rate cuts to happen. We believe that, the RBI has done
its bit by reducing rates by 50bps. So, this once again brings the focus on the
fiscal initiatives to be taken by the Government. For the markets, they
now have only the fiscal action to look forward to. The future direction of the
market hinges on how fast the Government is able to re-start the reforms
process. We believe that, the Government will start taking important decisions
on reforms in due course, which will provide further impetus to the overall
economy in the long term. Till these initiatives are taken, markets may remain
range-bound and may be dictated more by the quarterly numbers
and global markets.
Naushad Panjwani, Executive Director,
Knight Frank India:
The 50 bps reduction announced by the
RBI will give a huge sentimental boost to the real estate sector in general and
the housing loan segment in particular. Though this rate cut does not affect
the fundamentals of the RE market. We have seen a steady off-take in
housing loans despite the high interest rates and real estate prices. This cut
will only give it an extra fillip. However the larger impetus will come from
the other measures. At present, UCBs are permitted to assume aggregate exposure
on real estate, commercial real estate and housing loans up to a maximum of 10
per cent of their total assets with an additional limit of 5 per cent of their
total assets for housing loans up to ` 1.5 million. In order to facilitate
enhanced priority sector lending, it is decided to permit UCBs to utilize the
additional limit of 5 per cent of their total assets for granting housing loans
up to 2.5 million, which is covered under the priority sector. The Damodaran
Committee had observed that foreclosure charges levied by banks on prepayment
of home loans were
resented upon by home loan borrowers
across the board, especially since banks were found to be hesitant in passing
on the benefits of lower interest rates to the existing borrowers in a falling interest rate scenario.
As such, foreclosure charges are seen as a restrictive practice deterring the
borrowers from switching over to cheaper available source. It is felt that the
removal of foreclosure charges/prepayment penalty on home loans will lead to a reduction in the
discrimination between existing and new borrowers and the competition among
banks will result in finer pricing of home
loans with the floating rate.
Though many banks have, in the recent past, voluntarily abolished the
pre-payment penalties on their floating rate home
loans, there is a need for ensuring uniformity across the banking system in
this regard. Accordingly, it is proposed: not to permit banks to levy
foreclosure charges/pre-payment penalties on home
loans on a floating interest rate basis.
Arvind Chari, Fund Manager (DEBT), Quantum Asset Management
Company:
We believe they have front loaded their overall rate cuts
for the time being. This is a big
sentiment booster and will help revive some investment sentiments. “It must be
emphasized that the deviation of growth from its trend is modest. At the same
time, upside risks to inflation persist. These considerations inherently limit
the space for further reduction in policy rates” - a key statement
indicating the limited headroom for further rate easing. RBI seems to have accepted the fact
that – India’s non-inflationary growth trend is between 7% - 7.5% and
seen in that light the need for aggressive rate cuts might not be warranted as
base GDP growth is expected to come in the 7% - 7.5% band in FY 13. Further rate cuts will be completely
dependent on oil prices falling and food prices stabilizing. 10 year bond
yields have eased by 10 bps from yesterday close and currently trading at
8.35%. Further move will be dependent on impact of supply and on the trajectory
of Brent Oil prices. If Brent Oil continues its current downward trend, bond
yields can move down further. We see a reasonably wide band of 8.25% - 8.45% in
the near term. Short term market rates will ease a bit more from current
levels as cost of funding falls by 50 bps and liquidity remains comfortable in
Q1. The currency will draw
strength from the positive sentiment; but movement will demand on global
situation and pace and direction of capital flows. We expect banks to cut their base
rates by 25 - 50 bps bringing relief to borrowers.
Dinesh Thakkar, CMD, Angel
Broking:
The RBI’s move to cut the Repo rate by
50bps comes as a welcome surprise. The decline in average inflation levels by
more than 150bps compared to the levels prevailing during most of FY2011 and
FY2012 was clearly creating headroom for interest rates to come down and the
RBI’s move mirrors these macro conditions. So, I would expect even broader
lending and deposit rates to inch down by 50bps in the coming months, as lower
inflation enables higher financial savings and improving liquidity conditions
for banks. The RBI has appropriately also kept inflation within its radar in
order to keep inflation expectations anchored pointing out that potential GDP
growth is likely to be closer to 7.5%. So, I would conclude that the overall
headroom for interest rates to come down is likely to be a moderate 75-100bps
over the course of the year, which itself is a major positive for the overall
corporate earnings growth outlook, especially for rate sensitive such as banks
and infrastructure.
Chaitanya Pande, Head-Fixed Income,
ICICI Prudential AMC:
RBI through its annual policy
announcement today fired the first salvo leaving the ball in Government’s
court. Surprising the market by higher than expected rate cut of 50 bps, the
rate trajectory has now indeed taken a southward turn. The cut in rates has
been higher than the consensus expectation of 25bps. This was on account of
significant growth deceleration and manufacturing inflation having moderated
significantly by March 2012. Given the prevailing comfortable liquidity
situation, increasing the MSF to 2% is also a welcome step. RBI will be
watchful of GOI moves on subsidies, petrol hikes and inflation numbers before
it decides on any further rate cuts. Expect banks to cut their base rates soon
and pass on the benefit to borrowers. Expect the yield curve to steepen. Supply
pressure on G-Secs remains.
Aditya Birla Money:
As against the market expectations of
25 bps cut in Repo Rate, the RBI surprised the market with 50 bps cut. We
believe the banks to pass on the rate cut partially to the end consumers
thereby fuelling demand for credit going forward. However, the Central Bank signalled
limited space for further reduction in policy rates going forward. The RBI said
“The reduction in the repo rate is based on an assessment of growth having
slowed below its post-crisis trend rate which, in turn, is contributing to a
moderation in core inflation. However, it must be emphasized that the deviation
of growth from its trend is modest. At the same time, upside risks to inflation
persist. These considerations inherently limit the space for further reduction
in policy rates”. On liquidity conditions the RBI indicated that appropriate
and proactive steps will be taken, should the situation change which is
currently around the comfort zone of the RBI. From equity market perspective,
the RBI’s tone is slightly hawkish and we believe that the markets would
largely be range bound in the short term. Upside, if any, would come from
policy measures (containing subsidies and Government expenditure).
Shyam Srinivasan, MD & CEO, Federal
Bank:
RBI has given a strong signal and the
much needed impetus to the market with the repo rate cut of 50 bps. This front
ending of interest rate cut is a bold move that should see confidence returning
to the markets and lead to the virtuous investment/ capital formation cycle.
The move should provide right fillip to the industry for going ahead with
projects that were stuck on the drawing board. Though, RBI has guided that
the ability to moderate further is low, we believe that the year could see at
least two more rounds of rate cuts. Depending on the macro economic variables,
there could be a cut in CRR as well. The challenges on the domestic and
overseas front remain. However, I believe that appropriate policy measures can
reignite the growth cycle. The deposit and lending rates would come down,
as a result of RBI’s policy action. RBI’s move to raise the borrowing limit of
Banks under MSF from 1% to 2% will provide additional boost and improve
liquidity conditions.
Mushtaq Ahmad, Chairman, Jammu &
Kashmir Bank:
It is certainly a welcome step from the
RBI to ensure more liquidity into the banking system through a repo rate cut.
It will help banks like us, which have immense regional and pan-India lending
opportunities. At J&K Bank, when we are expanding our corporate and SME
loan book outside the J&K State, the rate cut scenario will allow us
generate volumes, customer base and remain competitive. We will be happy to
pass on the benefit of cut to borrowers. Though seemed temporary, the
initiative is an act of re-balancing towards checking inflation.
Harsh Pati Singhania, Director, JK Organisation:
RBI’s move to reduce policy rates by 50
basis points is welcome. It should provide impetus to growth by boosting
consumption and investment. It shows RBI is concerned over slowing down of
growth below post crisis trend rate. Therefore RBI seems to be taking
corrective steps before it gets too late. One hopes that the banking sector
will take a cue and reduce lending rates quickly so that the corporate sector
is benefited by the policy.
Pradeep Jain, Chairman, Parsvnath
Developers and CREDAI:
This was indeed a much awaited step
from RBI which came after almost thirteen increases in last two years. A 50 bps
cut in Repo Rate, bringing it to 8% is definitely going to boost the liquidity
in market thereby clearing the supply side hurdles up to a significant level.
As an after effect of the Union budget 2012-13, we were expecting a rate cut by
RBI to ease out the liquidity crunch in the market. The revision of Wholesale
Price Index inflation to 6.9% during March 2012 quarter from more than 9%
during its preceding quarter also gave some liberty to RBI to go for the rate
cut. For the real estate in particular, this is indeed a welcome step by RBI.
While the sector was already reeling under the pressures of high interest
rates, this will allow banks to lower down the interest rates significantly.
Both buyers and developers shall get benefited from this. Also, RBI has removed
prepayment penalty clause which is definitely going to cheer sentiments of
buyers across sector. As a developer we foresee some better results ahead and
thank RBI for considering the real issues of liquidity to this sector.
S M Lodha, CMD, Indsur Global:
The monetary policy review by RBI is a
good breather and therefore is most welcome. The industry was reeling under
heavy interest burden that was not only impacting expansion plans but also
impacting the competitiveness of the industry in global markets. The present
reduction of REPO rate would result into lowering the interest rates by Banks
by at least twenty-five basis points. One of the good features of the policy is
elimination of prepayment charges on home loans. This will have a good breather
for middle class people.... a good step. It is hoped that in the next review
RBI will consider a cut in CRR that will improve the liquidity.
Yadnesh Chavan, Fund Manager, Mirae
Asset Global Investments:
Today’s rate cut of 50 bps is the first
reduction in policy rates since 2009. The bigger than expected rate cut clearly
indicates a shift in policy stance towards boosting growth in a flagging
economy. However, at the same time the apex bank has raised concerns over the
persistent upside risks to inflation which could limit the scope for further
reduction in policy rates. From the statement issued by Reserve Bank of India
it is clear that the magnitude and timing of further policy rate cuts would
depend on the extent of fiscal consolidation, evolution of core and headline
inflation (once base effect wears off) as well as crude & global commodity
prices driven imported inflation.
(courtesy: myiris)
