A man drinks tea as he walks past the Reserve Bank of India (RBI) headquarter building in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

What Experts Made Of The April Monetary Policy Review

India’s monetary policy committee today kept benchmark lending rates unchanged, and revised the inflation forecast downward while projecting a nascent recovery for the economy.

The six-member committee voted 5-1 to keep the repo rate unchanged at 6 percent and reverse repo rate at 5.75 percent. The GDP growth forecast has been pegged at 7.4 percent for the financial year 2018-19. The decision was in-line with market expectations. All 42 economists polled by Bloomberg forecast a status quo on rates.

The Reserve Bank of India said it continues to remain vigilant with a neutral stance. The MPC noted that global economic activity and trade have strengthened. However, fears of protectionism and a potential trade war continue pose a threat to emerging market economies like India that rely on foreign capital flows for “their developmental aspirations.”

Most economists, bankers and analysts say that RBI will be on a prolonged pause and is in no hurry to move rates. Here is what they made of the policy review.

‘Sizeable Cut In Inflation Forecast’

Benchmark lending rates are “possibly” in a prolonged pause as long as inflation stays within the RBI’s comfort zone, according to Yes Bank Ltd.'s Chief Economist Shubhada Rao. A rate hike would anyway be very hard to justify with the current inflation trajectory, she told BloombergQuint in an interaction.

I don’t think they [RBI] are worried about growth momentum, and they seem less worried in terms of intensity of commentary as far as inflation risks are concerned.
Shubhada Rao, Chief Economist, Yes Bank

RBI’s commentary is a positive for the market, she added.

‘A Longer Pause’

India’s largest lender State Bank of India expected inflation to be more “benign” than what the markets were expecting, according to Deputy Managing Director and Chief Financial Officer Anshula Kant. And this has been validated now by the RBI revising down its inflation target, Kant told BloombergQuint in an interaction.

RBI has always been over pitching on the inflation side over the past few months. Bond yields have already started coming off and we expect that they could go down further in the coming days.
Anshula Kant, CFO, SBI 

Kant does not expect a rate hike to happen this year.

‘In No Hurry’

The policy was expected and now the MPC may remain in a pause mode in the near-term, said India Ratings & Research Principal Economist Sunil Kumar Sinha.

The tone of the policy commentary suggest that despite several uncertainties surrounding the inflation trajectory, RBI is not in a hurry to change its neutral stance of monetary policy. 
Sunil Kumar Sinha, Director – Public Finance & Principal Economist, India Ratings

‘Unexpectedly Dovish’

The policy was unexpectedly dovish according to HDFC Bank Ltd.’s Chief Economist Abheek Barua. However, whether this is a "transient bout of dovishness" or one that endures will remain a key question, he added.

If this is a permanent shift in the paradigm of inflation management from a singular focus on bringing long-term inflation down to 4 percent to an approach that is more supportive of growth, then the RBI might go for a long pause.   
Abheek Barua, Chief Economist, HDFC Bank

Barua added that bond yields that have rallied are likely to cool off slightly after this announcement. “Therefore, in the short-term, the benchmark 10-year bond yield could trade in the range of 7.1 percent to 7.3 percent.”

‘RBI In Wait-And-See Mode’

The status quo on rates and monetary policy stance is in line with expectations, but the downward revision of inflation forecasts is a positive surprise and suggests no imminent policy tightening, Nomura said in an emailed note.

We expect the repo rate to be left unchanged throughout 2018 as recent banking sector developments have raised concerns about the sustainability of the growth upcycle and underlying inflation remains around 4-4.5 percent, on our estimates, providing a sufficient real rate cushion.  

‘Reduces Risks Of Higher Lending Rates’

The MPC’s status quo has reduced the upside risks to bank lending rates that had started pricing in a turn in the interest rate cycle, according to Crisil. It noted that there was a de facto tightening of interest rates with about 7-8 banks raising their marginal cost of lending rate between 10-20 basis points despite the repo rate being unchanged. That worry stands reduced now, it added.

The status-quo was on expected lines. CRISIL expects the repo rate to remain unchanged over the next six months unless upside risks to the MPC’s inflation forecast materialise.
Crisil Research Note

‘Bit Too Optimistic On Growth’

The MPC’s assessment of the Indian economy is a “bit too optimistic on growth”, according to Edelweiss. The brokerage house expects inflation to "move higher much along the revised projections of the RBI".

The key monitorable lies on the external front where the central banks are exiting the ultra‐accommodative stance and therefore there is a risk of global rates moving higher. These developments will keep the RBI vigilant in ensuing months

‘Ind-AS Deferment Reduces Comparability’

RBI’s decision to defer the implementation of Ind-AS for banks by one year, reduces the comparability of banking performance with their global peers, according to Grant Thornton. The move will provide lenders with more time to prepare for the “potential impact on capital due to enhanced provisioning under Ind-AS,” Ashish Gupta, a director of the advisory firm said in an emailed note.

It should be noted that Indian banks will be at a different platform of financial reporting with their global peers who have either moved or shall move to IFRS 9 this year. 
Ashish Gupta, Director, Grant Thornton Advisory