What Economists, Industry And Market Experts Made Of RBI’s Policy

The Reserve Bank of India today kept benchmark lending rates unchanged but raised its inflation forecast and slashed the growth outlook for the country's slowing economy.

The monetary policy committee voted to keep the repo rate unchanged at 6 percent and reverse repo rate at 5.75 percent. The GVA growth forecast has been cut to 6.7 percent for FY18 compared to 7.3 percent earlier.

The decision was on expected lines with 31 out of 32 economists predicting a status quo policy in a Bloomberg survey. Economists, industry and market experts expect the RBI to hold its fire power on rates as the economic picture remains clouded by disruptions related to the Goods and Services Tax implementation and slowing growth.

‘Policy Instils Confidence Among Investors’

Further policy action by the RBI will be contingent on the evolution of the output gap and its impact on the inflation trajectory, ICICI Bank’s Managing Director and Chief Executive Officer Chanda Kochhar said in an emailed statement.

‘Q2 GDP Key Deciding Factor’

Another rate cut this fiscal is possible only if the risks to economic growth rise and inflation undershoots the monetary policy committee’s forecast, according to ratings agency CRISIL.

CRISIL believes that a large part of the growth slowdown is transitory. It cut its GDP forecast to 7 percent from 7.4 percent earlier, but added that “the economy will grind up over the next few quarters as the impact of demonetisation and destocking due to GST implementation wears off”.

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Industry Needed A ‘Feel-Good Factor’

The Federation of Indian Chambers of Commerce and Industry, which had sought a 100 basis point reduction in the “unduly high” interest rates, said that it was disappointed by the RBI’s decision.

The RBI should give “equal consideration” to growth prospects of the economy, as it does to inflationary pressures, Pankaj Patel, president of FICCI said in an emailed statement.

He added that the industry needed a “feel-good factor” to motivate people to spend and buy more. A rate cut would've helped “propel demand for interest sensitive sectors” like consumer durables, automobiles and housing, he added.

Fiscal Prudence By Centre May Create Room For Rate Cut

Weaker-than-expected economic growth, coupled with the government’s decision to maintain its budgeted fiscal target could open up room for one more rate cut, according to Nomura.

The Japanese brokerage, however, expects RBI to leave rates unchanged as it sees a “higher probability” of the government missing its 3.2 percent FY18 fiscal deficit target by 30 basis points.

Economic growth has bottomed out and will only recover from here on, Nomura said, adding that consumer price inflation will likely rise above 4 percent in the coming quarters.

‘Prudent Call’

Maintaining its neutral monetary stance was a “prudent call” by the central bank due to rising inflation and limited visibility on growth going ahead, said Rajni Thakur, economist at RBL Bank.

Thakur added that the slashing of growth outlook highlights fears “that have been impacting business and consumption sentiments in the economy”. These concerns will likely persist in the current fiscal as well, she added.

‘Appropriately Hawkish’

It was an “appropriately hawkish policy” by the RBI with not enough room to cut rates, said Vibhav Kapoor, group chief investment officer of IL&FS. With upside risks to the central bank’s inflation target, there's not much the RBI could’ve done, he added.

On the stress in India’s banking system, Kapoor said even Rs 30,000-40,000 crore of additional capital would not make a big difference to the health of India’s PSU banks, while questioning where the money would come from. And if the government manages to infuse more funds, it will run the risk of a higher fiscal deficit, he added.