RBI stance aimed at supporting demonetisation: Dalal Street

NEW DELHI: Dalal Street analysts reacted with shock and surprise to the Reserve Bank of India’s decision to keep the repo rate unchanged.
RBI was widely expected to lower the policy rate by at least 25 basis points.

Eighty per cent of the participants in an ETNow survey of analysts had predicted a 50 per cent cut in the policy rate by April 2017, while 17 per cent were of the view that even a 75 basis points rate cut was possible.

On Wednesday, analysts tried to read between the lines of the RBI policy statement and figure out what drove the policy stance.

Murthy Nagarajan, Head - Fixed Income, Quantum AMC:
It is a superb move by the RBI and MPC to not cut the repo rate. There were questions being raised on the RBI’s independence and Dr. Patel’s silence on the demonetisation issue, but with this non-consensus move of holding rates steady, we believe the RBI has made a big statement towards its independence and objectivity.

This, however, does not rule out further rate cuts and if the impact of demonetisation does indeed lead to lower inflation and slower growth, then the RBI will look to cut rates in its February policy review. By February, the RBI will have greater clarity on the global situation (FED rate hike and Donald Trump’s policies) and on India’s fiscal deficit for FY2017-18, which will allow them to take a more balanced view.

Karthikraj Lakshmanan, Senior Fund Manager – Equities, BNP Paribas Mutual Fund:
Markets traded cautiously, along the flat line in the first half of trade today only to witness a sharp drop after, contrary to market expectations, the Reserve Bank of India (RBI) kept repo rates unchanged at 6.25%. Additionally, the RBI has trimmed Gross Domestic Product (GDP) growth forecast for the current fiscal to 7.1% from a previous forecast of 7.6%. The central bank believes that the recent demonitisation of certain currency notes is likely to have a near term negative impact on economic activity. In the wake of the above announcement, the benchmark Sensex and the Nifty closed the day with losses of over 0.5%. Breaking from the recent trend, foreign institutional investors (FIIs) turned net buyers of Indian equities and bought equities worth net INR 161.80 crore, in yesterday’s trade. Barring the auto and metals indices, which eked out marginal gains, all other sectoral indices on the National Stock Exchange (NSE) traded in the red.

Bekxy Kuriakose, Head – Fixed Income, Principal Pnb Asset Management:
“Belying market expectations, RBI decided to keep key rates unchanged. Bond markets have expectedly reacted negatively given that 25 bps was already factored in with some segments even expecting 50 bps rate cut. RBI has clearly specified they need data and more time to evaluate the effects of demonetisation and clearly do not wish to react disproportionately to “short term transient” effects. Global developments including sharp rise in US treasury yields and expected hike in US Fed funds rate also seems to have weighed on the policy move. And on inflation they seem to have noted the resistance of core inflation (ex food and fuel) to downward impulses.”

Killol Pandya, Head Fixed Income, Peerless Funds Management Company Ltd:
“RBI has kept a status quo in the interest rates for now. While some participants were expecting a 25bps cut there was always a good probability of status quo. The upcoming FOMC meet in which a US rate hike is widely expected, upside risks to inflation and the expected resumption of relative normalcy in market liquidity seem to be the main drivers behind RBIs decision. The withdrawal of CRR also seems to be in line with the RBIs comprehensive policy of managing market liquidity through MSS and other OMO routes. The policy may have short term negative impact on the market but seems constructive from a medium to long term perspective."

Shanti Ekambaram, President – Consumer Banking, Kotak Mahindra Bank:
“The RBI surprised most market participants today with a “pause” on interest rates as against expectations of a 25 bps repo rate cut. Uncertain global and local factors have prompted this pause, and the RBI will now wait and watch for more trends and data.

Global factors like better growth in the US in the second half, impending Fed rate hike, outcomes of US presidential elections, outflow of funds from Emerging Markets, and local factors like unclear effects of withdrawal of SBN, inflation trajectory, expected volatility in financial markets due to global factors seem to have culminated in RBI’s “wait and watch” stance.”

Surendra Hiranandani, CMD, House of Hiranandani:
Considering the current economic situation, it is disappointing that the RBI has chosen to maintain status quo on policy rates. This coupled with sluggish credit off take over the last few months has dampened economic activity across all the sectors. There is an urgent need to focus on growth and create more jobs that will strengthen the economy. A rate cut in the February policy seems inevitable now as the Central Bank would have got better clarity by then on the impact of demonetisation.

The highlight of the policy was the withdrawal of incremental CRR that will have an immediate effect of 25 bps and provide further liquidity in the system.

Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak Mutual Fund:
Unchanged policy rate was a surprise for the market. Hardening of yields in most of the developed nations along with forex volatility, may have heightened RBI’s risk perception. At that, the spike in international oil prices and stickiness in inflation seems to outweigh concerns for growth. RBI seems to be awaiting further data to assess impact of demonetisation on growth. RBI’s assessment of Inflation continues to be at 5% by Mar-2017. Were the economy to not perform as per expectation over next 2-3 quarters, the central banker’s appetite for rate cut could increase further.

Motilal Oswal, CMD, Motilal Oswal Financial Services:
This is a good tactical call as this will still leave a chance with RBI Governor to see how the global economy reacts to Fed move and then take a call on domestic interest rates.

One of the reason of not reducing Interest rate could be possibility of FeD increasing the rate in the next week's meeting. If the rate hike in US happens then that will increase the probability of flows moving away from EM and into US treasury. With the reduction of domestic interest rates there would be additional outflow from Domestic debt as the gap between risk adjusted return in domestic debt vs US treasury reduces substantially.

Indranil Pan, Chief Economist, IDFC Bank:
It was good thinking on the part of the RBI to have maintained status quo on all monetary policy parameters. Importantly, the assessment comes from a distinct understanding that while near-term implications for growth from demonetisation is negative, the longer term implications are unclear and can revert back sharply as the cash crunch reverses. On the other hand, the assessment on inflation dynamics is hawkish with the RBI indicating that the downside implication for retail inflation out of the demonetisation exercise could be limited to only 10-15 bps while there could be upside risks emerging from higher crude oil prices and likely depreciations of EM currencies due to firmer interest rates in the US.

While we still think that there could be a last 25 bps cut remaining, probability of it being delivered in February may be low as assessment of the overall implications of demonetisation might still not be clear.

Kumaresh Ramakrishnan, Head-Fixed Income, DHFL Pramerica Asset Managers:
Given that re-monetisation was proceeding at a fast clip, it appears that RBI is more confident of a quick rebound in growth starting from Q4.
RBI assesses the demonetisation impact on CPI to be only 10-15 bps, even as the non food and fuel component continues to exhibit downward inflexibility. Simultaneously, RBI expects some likely pressure on inflation from rising oil prices, heightened global uncertainties, unclear US monetary policy stance and any related volatility in exchange rates. On balance, the CPI for Q4 is still assessed at 5% with some upside risks.

CapitalVia Global Research:
The decision of keeping the rate unchanged is, we believe, mainly to support the demonetisation move taken by the government. However going forward we expect the possibility of rate cut up to 50 bps over next 2-3 policies to limit the downside from demonetisation of higher denomination notes and to put a positive impact on easing consumer inflation. As inflation is likely to be under RBI's trajectory as per our projection chances of the same is higher.

However, global dynamics and action of other major central banks globally can put a constraint on RBI. Fed action is going to be key in that respect. Another factor which is important to track is the growth rate.

Beyond this point, we are not expecting any rate cut as the dollar has strengthened significantly since Trump's victory and we expect the rupee to depreciate. This will create constraints for RBI to be aggressive on rate cut.

Mahendra Kumar Jajoo, Head –Fixed Income Mirae Asset Global Investments:
RBI referred to increased volatility in global markets, recent rise in US bond yields and the sell-off in emerging markets currencies and bonds that could lead to spill over impact on India. Also, RBI reserved its guidance on expected impact on economy of the demonetisation measure though broadly suggesting that the slowdown currently witnessed may be of a transitory nature.

RBI statement also puts focus on sticky core inflation and the current momentum of MoM rise in components of CPI basket. The recent spike in global oil prices post the talk of OPEC deal may also impact inflation adversely.

Thus in one sentence, at the core, the focus of today’s policy seems shifting to global environment of rising yields and emerging markets outflow as against last policy, where the domestic benign factors specially subdued inflation and improving fiscal position of the govt created room for a rate cut.