Reserve Bank Governor Raghuram Rajan has cut the key interest rate by 0.25 per cent, making it the third time this year on Tuesday, meeting market and government expectations of boosting growth by lowering borrowing cost.
But what are experts saying on the cut. The Quint looks at insights from brokerage firms/ research houses.
The Reserve Bank of India (RBI) lowered the repo rate by 25bp to 7.25%, in line with consensus and our expectations. It stated that contained inflationary pressures despite unseasonable rains, a likely pushing back of the timing of monetary policy normalisation in the US and mixed indicators of a domestic recovery all created space for the rate cut.
The RBI lowered its FY16 GDP growth projection from 7.8% to 7.6% with a downward bias, and revised up its inflation projection to 6% by January 2016 from 5.8%, due to monsoon risks and the higher services tax rate.
As expected, the forward guidance is neutral and data dependent. In his press conference, the RBI governor stated that policy is “neither conservative nor aggressive”, but rather at a Goldilocks level. Therefore, we feel policy rates are now neutral. The RBI is now data dependent watching monsoons, oil prices and external sector risks. Although the RBI has left the door open to further easing in the event of further disinflation, we expect it stay on a prolonged pause (until end-2016), as we believe that growth is in the initial stages of a business cycle recovery, inflation appears to be stabilising around 5.0-5.5% and inflation expectations are still elevated.
– Nomura
The Reserve Bank has cut the Repo rate by 25 basis points, along expected lines. The RBI has also mentioned in its policy statement that the rate cut is front-loaded which indicates the RBI’s concern on the inflation front due to uncertainties related to monsoon and crude oil prices. The CPI has been revised upwards to 6% by January 2016, on the back of the below-normal monsoon forecasts and firming crude oil prices. The food grains production for 2014-15 has already shown a decline of more than 5%, coupled with this the non-availability of buffer stocks for pulses and oil seeds would result in inflationary pressures as base effect starts waning after August 2015. However, in our view, proactive government measures on food grains supply may result in inflation surprising positively, which would then provide room for more rate cuts post monsoon.
– Dinesh Thakkar, Chairman & Managing Director, Angel Broking
The signal (of raising the inflation estimate and simultaneously cutting the policy interest rate by an explicitly inflation-targeting central bank) could be a bit confusing. Governor Rajan has, however, made it clear that the rate cut aims at stimulating investment. If things turn out as expected—6% inflation by Jan’16—- little scope would exist for another rate cut till then. A seriously deficient monsoon or a spike in crude oil prices would put the RBI in a precarious position.
We expect the RBI to further pressure banks to transmit the policy-rate easing since Jan’15. Also, the RBI is likely to take a more accommodative stance on liquidity. Barring unexpected softening of either growth or inflation, we expect no further rate cut in FY16. The emerging situation would be negative for PSU banks (NIM compression) and positive for leveraged companies (softer bank lending rates).
– Anand Rathi Research India Equities
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