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RBI policy: Ball is back in govt's court to revive growth, say brokerages

The Reserve Bank of India (RBI) kept repo rate unchanged in its Monetary Policy review today. Most leading economists and research houses expected the central bank to cut rates for the sixth time in a row in its fifth bi-monthly monetary policy meeting of the financial year 2019-20 (FY20) on Thursday. The RBI, however, cut the GDP growth forecast for FY20 to 5 per cent from 6.1 per cent earlier. 

Here's how leading market experts have interpreted the development:

Rupen Rajguru, executive director, head of equity investment & strategy, Julius Baer

With the front loading of 135bps rate cuts this year, the bar / hurdle for incremental rate was high and now this move of maintaining status quo, we believe that the RBI would wait for the Union Budget to get clarity on fiscal slippages / fiscal stimulus before taking further monetary action. If the growth continues to surprise on the downside and inflation remains within comfort zone of RBI, there is a possibility of another rate cut. Meanwhile, the focus of MPC / RBI would be on – (a) effective transmission of rate cuts, (b) improvement in credit flow, and (c) lower term spreads at longer end and lower rated corporate bonds. These factors are critical improvement in economic activity

Joseph Thomas, head of research, Emkay Wealth Management

There are three reasons why there was actually no need for the RBI to cut the rates this time. First, the retail inflation indicated by the consumer price index (CPI) has shot up to 4.62 per cent, well above the RBI target ceiling of 4 per cent. This would require caution. But the component that has affected the price level is the prices of fruits and vegetables. This is considered a seasonal factor and its impact may wane off over the next one or two months. But it is a bit worrisome that the prices of fruits and vegetables are continuing to remain elevated and in some cases it is too high that it may not come down too soon. And this would mean that the impact on CPI may be longer than expected.

Second, the rupee is weaker today than it was three months ago. A weaker rupee is akin to lower interest rates. Since the Rupee is expected to be weaker from here, a cut may not be the best thing to do at this juncture since effective lower rate is already established with a weaker currency.

Third, the liquidity in the interbank market and the systemic liquidity are in surplus to see the auctions go through smoothly. The liquidity conditions ensure that rates especially at the short-end of the curve remains low. This is what is actually achieved by a repo rate cut, too. Therefore, a cut was not required at this juncture, in my view.

Kotak Institutional Equities

While the RBI has kept the option of further rate cuts, it will depend clearly on the inflation prints, especially January and February prints (due in mid-February and mid-March) which will indicate if late kharif arrivals lead to cooling of food prices (especially onion prices).

As of now, we do not see a rationale for a rate cut in February policy based on the current thought process of the MPC given that: (1) favorable inflation prints, if any, will be visible after February policy, (2) inflation expectations have increased given its adaptive nature, and (3) growth outlook is unlikely to change significantly. Given our GDP and inflation estimates over the medium term, we still see space for 50 bps of rate cuts but timing will depend on the evolution of growth-inflation dynamics in FY2021.

We note that the RBI explicitly mentioned the need for lower interest rate on small savings schemes to aid monetary transmission. We have been highlighting the issue of small savings and transmission since early this year

Jimeet Modi, Founder & CEO, SAMCO Securities & StockNote

The RBI has finally thrown the ball back in Government’s court to revive the economic engine, which has further deteriorated since the last meet. Transmission of interest rates have not happened yet which could be one of the reasons RBI waited to cut rates and nudged the Government and banks to take efforts from their end. Additionally, slightly higher inflationary tendencies might have also led to the pause in rate cut. But, this is a negative for the markets as a rate cut was required to boost risk taking appetite in the economy.

Arun Kumar, head of research, FundsIndia

Today’s status quo on repo rates came as a surprise as consensus was for a 25 bps rate cut. However RBI continues with its accommodative stance given its outlook for moderation in inflation below 4 per cent by H1 FY21. The concerns on relatively higher inflation (4.7-5.1 per cent) expected in the near term has led to the pause in rate cuts.

While RBI has left space for future rate cuts, better monetary policy transmission, improvement in tight credit conditions and support from fiscal policy will remain the key for sustainable recovery.

Anuj Puri, chairman, ANAROCK Property Consultants

From real estate point of view, rate cuts are always welcome as they help improve overall sentiment. Also, lag-less transmission of rate cuts to retail borrowers as RBI has mandated banks to directly link interest rates with repo rates. The expected rate cut of 25 bps would have caused home loan rates to fall below 8 per cent. However, it is also true that another rate cut alone would have been insufficient to stir housing sales significantly across budget categories. The previous rate cuts throughout 2019 had almost no perceptible impact on residential sales. In fact, back in 2014, even when the home loan rates were high in two digits at 10.3 per cent, housing sales remained at peak levels.

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