RBI rate cut shows dovish stand, expect more later, say experts

The Reserve Bank of India cut its repo rate by 25 basis points to 6.50 percent on Tuesday, making a widely expected first reduction since September to bring the rate to its lowest in more than five ye

The Reserve Bank of India on Tuesday cut its repo rate by 25 basis points to 6.50%, making a widely expected first reduction since September to bring the rate to its lowest in more than five years.

But in a surprise move, the RBI also raised the reverse repo - or the rates lenders charge to the central bank - by 25 basis points to 6.0%, taking measures to ensure more availability of cash in the banking system.

Here are what leading economists and company executives had to say about the rate cut. 

"The policy sounds dovish. Greater focus is on liquidity management, more importantly the commenatry is clearly guiding on further rate cuts, with four riders, namely: good monsoon, low headline CPI, softening core CPI and improving rate transmission. On these four parameters further rate cuts would play out," said Shubhada Rao, chief economist at Yes Bank.

Radhika, Rao, Singapore-based economist at DBS Bank, said "In all, today's decision was more focused on addressing liquidity shortage and easing the transmission mechanism. There is a significant shift in their emphasis on the NDTL framework, narrowing the corridor around the operational repo rate and CRR changes. This is to ensure that the easy policy stance percolates to the real economy and materially lowers financing costs. These changes are likely to provide positive impetus to the financial markets in the near-term."

The CEO of New Delhi-based real estate major DLF, Rajeev Talwar, said "The cut is a good one if it is passed on by the banks and bank rates come down. The governor has been very conservative. The government has been much more proactive by easing FDI rules and taking other measures. The economy is on a recovery path despite the RBI. This round goes to the finance minister."

"Whether we will have future rate cuts or not depends on what kind of stance the RBI Governor is taking. We expect there could be further rate cuts ahead," said Mahantesh Sabarad. of SBI Cap Securities. "One of the important data points that the governor had to work with is that there is a normal monsoon forecast ... which is the first preliminary forecast. Therefore it tells me that there could be another rate cut by 25 basis points sometime during May-July".

Saugata Bhattacharya, senior economist at Axis Bank, said "Policy remains accommodative. Over the next two months, if rainfall conditions remain better and with an eye out on global economic conditions, they still have room for another 25 bps rate cut.

"On the rate corridor move, I think they are moving towards Phase II of the liquidity managment framework, keeping overnight rates closer to policy rates. They're managing short-term rates well while keeping durable liquidity supply stable."

Quantum Advistors' head of fixed income and alternatives, Arvind Chari, said the move was "to bring system liquidity to neutral along with the narrowing of the corridor to 50 bps and CRR maintenance at 90 percent will allow overnight rates to remain very close to the repo rate or even drift marginally lower. We expect proactive OMOs to get the 'core' liquidity back to zero. Market seems to have though as of now ignored the projected increase in inflation by RBI and its rhetoric on impact of sixth pay recommendation. Although the door for another cut is open, but the bar is high now."

A. Prasanna, economist, ICICI Securities primary dealership, said "The rate action was in line with our expectations. The narrowing of the LAF corridor is understandable however it may cause some uncertainty about stability of the corridor. The change in liquidity stance is surprising given the uncertainty surrounding the external profile and the buildup of forex assets. It remains to be seen whether RBI will be successful in achieving neutral liquidity balance."