What Economists, Bankers And Market Analysts Made Of RBI’s ‘No Surprise’ Policy

The Reserve Bank of India on Wednesday cut the benchmark repo rate by 25 basis points to 6 percent on expected lines, acknowledging the steep fall in consumer price inflation. The central bank, however, maintained its neutral policy stance, leaving economists and market analysts divided over the possibility over future rate cuts.

Four members of the monetary policy committee voted in favour of a 25-basis-point cut, one member voted for a 50 basis point cut and one voted for status quo.

Explaining its decision to cut rates, the central bank said some of the upside risks to inflation have either reduced or not materialised. “Consequently, some space has opened up for monetary policy accommodation, given the dynamics of the output gap,” the RBI’s policy statement said.

The inflation trajectory is, however, expected to rise from its current lows, Patel told BloombergQuint when asked why the central bank chose to keep its policy stance unchanged, leaving the RBI “cautious enough to stick to a neutral stance”.

While majority of the economists and market experts were expecting a 25 basis point cut, some had also hoped for a more aggressive 50 basis point reduction. Here is what they made of RBI’s August bi-monthly policy review.

Finance Ministry Welcomes Rate Cut

The finance ministry welcomed the rate cut saying that it was necessary for sustaining growth.

‘Will Reinforce Confidence’

Welcoming the RBI’s decision, ICICI Bank’s Chanda Kochhar said the move “will reinforce confidence amongst global investors”.

‘RBI Acknowledges Downside Inflation Pressure’

The reduction in repo rate clearly acknowledges the downside pressure to inflation, Yes Bank’s Rana Kapoor said in an emailed statement.

‘Fed Tightening May Give More Room For Another Cut’

The U.S. Federal Reserve, a “critical component” in RBI’s rate decision, is unlikely to raise rates at least till December, offering India’s central bank a “the window of opportunity” for one more cut at the next policy review, according to Rajiv Anand, executive director of Axis Bank.

Anand expects another 25 basis point rate cut in the current year.

‘Knee-Jerk Reaction’

The rate cut was a knee-jerk reaction to the recent dynamics between growth and inflation, said Rajni Thakur, economist at RBL Bank.

He added that the transmission of the rate cut would be “less effective at present” as the banking system liquidity is likely to shrink in the second half of the current fiscal.

A rate cut during this period of low inflation is likely to bring down inflation expectations further, he said.

‘Watch Inflation Closely’

The RBI’s decision to cut the repo rate is “appropriate”, according to Soumya Kanti Ghosh of SBI, as any further delay could have been a little late in terms of the overall demand”.

The likelihood of future cuts will depend on the inflation trajectory, he added.

According to SBI, inflation numbers in the coming days will actually start to rise. “Possibly next month, the inflation number could be sub-2 percent but thereafter the inflation will rise, and possibly cross four percent by November 2017,” Ghosh said.

‘Further Cuts Unlikely’

A “very cautious” outlook with no change in stance, along with the 4 percent inflation target would mean that further rate cuts are “unlikely”, said Abheek Barua, chief economist at HDFC Bank. Besides, there could be a slight acceleration in liquidity drainage. This does not bode too well for interest rates going forward, he added.

There could be some rate action in the immediate future, but a lot has already been priced in, he said, adding that the “incremental effect remains to be seen”.

Also Read: RBI Cuts Repo Rate By 25 Basis Points, Keeps Policy Stance Neutral

‘Needed More’

While a 25-basis-point rate cut is welcome, Shishir Baijal, chairman and managing director of Knight Frank India was expecting a “more aggressive rate cut”.

He added though, that they were “happy” that the central bank adopted “a monetary policy that propels growth”.

‘Surprised That It Wasn't A Surprise’

The most surprising fact in the monetary policy was that the rate cut was in line with market expectations, said R Sivakumar, head of fixed income securities at Axis Mutual Fund.

Sivakumar added that if the inflation maintains its current trajectory then the RBI may have “another cut available in its arsenal” in the next few months.

‘Prolonged Pause’

Nomura expects a prolonged pause from RBI as it expects both inflation and growth to rise over the next six to 12 months.

The central bank’s neutral stance suggests that the RBI’s decision-making remains data dependent, Nomura said in its report.

‘No Hurry’ For Next Rate Cut

Citi does not expect RBI to cut rates in a hurry as the central bank is likely to track the upward move in consumer price inflation over the next few months, it said in a post policy note.

The foreign brokerage maintains its expectation of another 25-basis-point repo rate cut in the fourth quarter, pending more visibility around meeting the 4 percent CPI target in a sustained manner.

‘Room For One More Cut’

CPI inflation will broadly remain within the RBI’s forecast range for the next few months, Credit Suisse said in its note. While the brokerage does not expect the RBI to cut rates further this year, it did not rule out another 25-basis-point cut later this year.

‘Bar For Next Rate Cut Gets Higher’

According to JPMorgan, while further rate cuts by the RBI cannot be ruled out, “after today’s cut, the bar for another cut gets higher”. To that expect, the brokerage expects the central bank to keep rates on hold for the foreseeable future.