Surprising But Prudent: How Economists Reacted To RBI’s Rate Decision
26 out of the 33 economists polled by Bloomberg expected a 25 bps cut.
The Reserve Bank of India on Wednesday kept the benchmark repo rate unchanged at 6.25 percent against the consensus of expectations. 26 out of the 33 economists polled by Bloomberg had expected the policy rate to be reduced by 25 basis points.
Global volatility and inflation risks were the major reasons for not changing the rate, the central bank said. Notably, all the six members of the monetary policy committee voted in favour of holding rates.
Here is what various brokerages and analysts made of the central bank's unexpected move.
Prudent Decision: Nomura
While the decision to hold rates was a surprise, the decision to stand pat is a prudent one, according to Nomura Research. It’s more important to focus on the transmission of rate cuts by the banks rather than reducing benchmark rates further, the global financial major said.
We also expect demonetisation to hurt short-term activity, but we do not see any medium-term damage as it will only result in wealth redistribution, and not much wealth destruction. Moreover, while headline inflation is low, underlying inflation has stabilised around 5 percent. As such, in the light of improved banking system liquidity, the focus needs to be more on the transmission of the rate cuts already delivered, rather than lowering the signalling rates much further.Nomura Research
Status Quo The Correct Step Amid Uncertainty: India Ratings
Geopolitical uncertainty and the expectation of a U.S. Federal Reserve rate hike has put the rupee under pressure. The RBI was right to hold policy rates till a better assessment of the impact can be made, India Ratings & Research said in a note.
Global situation post the Brexit, Donald Trump becoming President elect of U.S. and Referendum defeat of Mr Renzi in Italy has created a substantial geopolitical uncertainty. With Fed expected to raise the policy rates in its forthcoming review has resulted in capital flight from emerging markets putting significant pressure on India’s currency. Clearly, this coupled with an uptick in global crude prices will have implications for domestic inflation. No doubt de-legalisation of high denomination currency has created a downward bias in inflation due to cash crunch and decline in consumption demand but in Ind-Ra’s view these are of transitory in nature. Therefore, when the situation is still evolving and fuller assessment is not possible a status quo is correct step even if this means falling behind the curve post facto.Sunil Sinha, Principal Economist, India Ratings & Research
Policy Amid Uncertainty: HDFC Bank
The RBI’s policy decision is understandable, coming as it does “in the middle of a large amount of uncertainty”, according to HDFC Bank.
The downward revision in GDP growth for financial year 2016-17 to 7.1 percent from 7.6 percent earlier is considerable and suggests a deceleration in the second half. This would have warranted a rate response but the inflation concern got the better of the central bank, Abheek Baruah of HDFC Bank said.
The only disappointment, according to him, was the the lack of clarity on when some of the liquidity impounded by the incremental CRR requirement – which has now been reversed – will be released through interest-bearing instruments.
Happy With RBI’s Move: DBS India
DBS India said the messaging from the RBI is clear – the central bank sees the slowdown in growth is temporary. The worry is probably more pronounced on the inflation side.
“They (RBI) are worried about inflation firming up, a kind of bottom being put in place. Crude oil is looking higher. That's also a risk to inflation numbers. With U.S. interest rates looking to go higher, it's important we are not caught on the wrong side of the rate cycle,” Arvind Narayanan, executive director and head of sales, treasury and markets at DBS India said.
Short-term rates may fall as a result of the RBI’s decision while there could be some adjustments in overnight rates as a result of the reversal of the incremental CRR requirement, Narayanan said. He expects more relaxation on withdrawals over the next 30-60 days, which will make the system liquidity neutral, or not as liquidity surplus.
RBI Had Room To Cut Rates: HDFC
My sense is that there was some room to cut rates. In my view, I would’ve certainly expected a 25 basis point rate cut. Maybe if they really wanted to boost market and improve sentiments, they could even have perhaps made it 50 basis points. But my personal view is that they held back on the rate cut probably for three reasons. One is that the total room available for them to cut rates may be 50 basis points and if you take a slightly longer term view, maybe a maximum of 75 basis points. That’s an ammunition you may want to keep with you for a longer time and use it when you believe it can really make a difference.Keki Mistry, Vice Chairman and CEO, HDFC
Removal Of Incremental CRR Limit A Positive: SBI
The country’s largest public sector lender State Bank of India said the decision to keep the repo rate unchanged was a little surprising given that there has been sizable demand destruction. The RBI may have been prompted by the rise in crude oil prices and the upcoming Fed rate hike, chairman Arundhati Bhattacharya said in an emailed statement
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Lending Rates Will Trend Lower: ICICI Bank
The RBI has maintained stability in monetary policy with a focus on the medium-term inflation targets being sustainably achieved, while continuing to be supportive of growth, ICICI Bank said in an emailed statement.
A February Surprise From RBI: Yes Bank
The RBI seems to be in wait-and-watch mode, said Shubhada Rao, chief economist of Yes Bank. The commentary was inclined towards managing inflation expectations while growth concerns were more muted, she added.
In our opinion, on both these fronts we expect some downside. On growth we are looking at a 90 bps correction. More importantly, on inflation, though RBI has shown its concern on core inflation, the policy nuance is more on headline inflation which in our expectation could surprise us on the downside for end March by as much as 40-50 bps; and to which, we believe, the RBI could deliver a big rate cut post budget sometime in February, given the revised growth inflation dynamics that play out by February.Shubhada Rao, Chief Economist, Yes Bank
Rate Cut Would’ve been the ‘Icing On The Cake’: VS Parthasarathy
A rate cut would have been the “icing on the cake” given that the Indian economy was already in a comfortable position before demonetisation, said VS Parthasarathy, group chief financial officer of Mahindra & Mahindra Ltd. Inflation was already below RBI’s targeted level, and demonetisation led to a surge of liquidity flowing into the banking system, Parthasarathy pointed out. Business growth, at a fragile state, would have received a boost with a rate cut, he added.
A rate cut would have been the icing on the cake and a boost for growth. However, the RBI is probably awaiting the transmission of earlier cuts and has therefore, deferred the rate action. Now that the liquidity is good and the cost of the liability side of banks is going down, hopefully the banks will now act. This will enable the RBI to deliver another growth boosting cut soon when they see abatement of “heightened uncertainties”.VS Parthasarathy, Group Chief Financial Officer, Mahindra & Mahindra
Wait And Watch Stance: Kotak Mahindra Bank
Uncertain global and local factors have prompted this pause and the RBI will wait and watch for more trends and data, according to Kotak Mahindra Bank.
Global factors like better growth in the U.S. 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” stanceShanti Ekambaram, President-Consumer Banking, Kotak Mahindra Bank
RBI Will Be Data Dependent For Next Cut: Canara Bank
The decision to keep policy rates unchanged will help stabilise the rupee while also anchoring inflation expectaions, Rakesh Sharma, the chief executive officer and managing director of Canara Bank said.
Good policy by RBI. Citing risks to inflation, RBI has kept the key rates unchanged. This will ensure stability to currency and anchor inflation expectations. However they have rolled back the temporary measure which impounded 100 percent of incremental NDTL by means of CRR. The revised MSS will ensure banks get a yield on their new deposits arising out of demonetisation. As we get clarity on inflation and what Federal Reserve does later this month, we can expect rbi will be data dependent for next cut.Rakesh Sharma, CEO & MD, Canara Bank
Rate Cut Could've Been Encouraging: Knight Frank
A 25 basis point rate cut by the RBI could have given a much needed boost to the real estate sector which is seeing trouble since the government's move to demonetise Rs 500 and Rs 1,000 currency notes, Shishir Baijal, chairman and managing director of Knight Frank India said.
A rate cut could have been encouraging at this moment. However, it is disappointing that RBI decided against it. We were expecting a 25 bps cut, which could have given an impetus to the beleaguered real estate sectorShishir Baijal, CMD, Knight Frank