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Monetary Policy: Here’s What Brokerages Made Of RBI’s Repo Rate Cut

The Monetary Policy Committee’s 25-basis-point cut in the benchmark repo rate was mostly in line with analysts’ expectations.

The Reserve Bank of India building in Mumbai. (Pjhopt)
The Reserve Bank of India building in Mumbai. (Pjhopt)

The Monetary Policy Committee’s 25-basis-point cut in the benchmark repo rate was mostly in line with analysts’ expectations. Most of them also see a room for lowering rates further as India’s central bank remains concerned about growth.

The Reserve Bank of India has cut rates by a cumulative 135 basis points since the start of this year. The MPC decided to maintain its stance at ‘accommodative’, “as long as it is necessary to revive growth, while ensuring inflation remains within the target”.

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Here’s what brokerages have to say…

Nomura

  • MPC maintained its “accommodative” policy stance, implying the next policy action is either a hold or a cut.
  • A benign 25-basis-point cut suggests the RBI’s trying to balance growth concerns against limited remaining monetary policy space and a diminishing efficacy of monetary policy in boosting growth.
  • A front-loaded policy action would have been the right approach, as it would have enabled banks to sharply lower their lending rates ahead of the upcoming festive season.
  • Lowers its FY20 growth projection but is still optimistic.
  • Downside risks to its FY20 growth forecast of 6 percent, although the brokerage expects the growth rate cycle to improve due to the lagged effects of easier monetary policy.
  • The rate easing cycle may be is closer to its end. Expects the RBI to deliver a final 15-basis-point cut in December.

BNP Paribas

  • Despite the rate cut and the dovish commentary, equity market reacted negatively, especially banks.
  • That’s because the RBI’s focus on quick transmission of lower interest rates would put pressure on margins of banks.
  • Limited elbow room if the RBI further takes monetary actions to support the economy.

Barclays

  • Expects the RBI to reduce repo rate by another 25 basis points in December, followed by another 15 basis points in February.
  • RBI Governor Shaktikanta Das said the central bank has kept options open on liquidity on the internal working group. His comment is in contrast with the recently released recommendations from the RBI’s internal working group. Today’s remarks give a strong signal that the central bank is not necessarily bound by the recommendations of the working group.

Anand Rathi

  • Expects that rather than 5 percent, the repo rate in this cycle would bottom out at 4.5 percent.
  • The RBI’s stance, coupled with the recent government measures, bode well for the equity market.
  • Likely deeper policy rate cut, coupled with focus of the RBI on transmission of policy rate cut in the credit market, would result in softening of bond yields more than expected.

UBS

  • The focus needs to be towards improving monetary transmission as it remains partial and delayed.
  • Continues to maintain base case view of terminal repo rate at 5 percent or slightly below (15-25 basis points further easing) as of March 2020.
  • Cumulative monetary easing so far and regulations for the NBFC sector may speed up monetary transmissions and bring some relief to borrowing costs.

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