MUMBAI (Reuters) - The Reserve Bank of India (RBI) cut its key repo rate by a bigger-than-expected 50 basis points to 6.75 percent on Tuesday, with inflation running at record lows and the economy in danger of slowing down.
A Reuters poll last week showed only one out of 51 economists had expected a 50 basis points rate cut, while 45 had expected a 25 bps cut.
COMMENTARY
RADHIKA RAO, ECONOMIST, DBS, SINGAPORE
"Policymakers have drawn confidence from the recent pullback in CPI inflation, notwithstanding base effects, and expect price pressures to be contained into FY17 as inflation target shifts to 5 percent.
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"This bunched-up move is likely to reinvigorate the transmission process, marking another step to improve the sensitivity of retail rates to policy changes. A bigger rate cut also, on the other hand, highlights the central bank's concern over the underlying growth momentum, especially given the disappointing reform progress and leveraged banks/corporates."
SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK CAPITAL, MUMBAI
"A more of a front end surprise by a 50 bps lucrative cut. Though the cuts were expected to be staggered during CY 15, the central bank's move in passing it upfront to support a stable recovery in investment activities is a welcome step.
"Though the tone still remains accommodative, the key to watch for further easing would centre around government's move in effective supply management of pulses and other high price vegetables followed by the bankers' move in passing on the cumulative move of subsequent rate cuts in to their respective base rate revisions. With front loading rate cut, the probability of another 25 bps might fit in to the scenario towards the last quarter of current fiscal given the base line CPI projection falls within the revised target band of 5.0 percent-5.8 percent."
BADRISH KULHALLI, FUND MANAGER, FIXED INCOME, HDFC LIFE, MUMBAI
"The move clearly shows RBI's comfort level with prices coming down has increased in recent months and now they are in a place where they want to spur growth going forward."
KILLOL PANDYA, HEAD OF FIXED INCOME, PEERLESS FUNDS MANAGEMENT, MUMBAI
"It is a pleasant surprise. Eventually 10-year yield should hover towards 7.50 percent. Steady relaxation for foreign investors in government securities is also a big positive for Indian debt market. I see a sustainable rally in bonds. Stance of RBI is leaning towards dovish side. (The RBI) governor has done his part and now expects government and banks to do their part in supporting the economy."
RUPA REGE NITSURE, CHIEF ECONOMIST, L&T FINANCE HOLDINGS, MUMBAI
"A higher than expected easing is certainly bond positive. How, it gets transmitted to the real sector via credit markets remains a concern given the huge pile of stressed assets in the banking system. The use of the term front loading clearly signals that there is going to be a long pause after today's move."
NAVNEET MUNOT, CHIEF INVESTMENT OFFICER, SBI FUNDS MANAGEMENT, MUMBAI
"A cut of this magnitude was warranted and this will have positive ramifications on growth and markets. We should test 7.50 percent on 10-year yield with potential to go even lower. The linkage of real rates to 1-year treasury bill opens up room for further rate cuts."
ATSI SHETH, ASSOCIATE MANAGING DIRECTOR, SOVEREIGN RISK GROUP, MOODY'S INVESTORS SERVICE, SINGAPORE
"The extent of the cut was higher than market consensus, suggesting that RBI sees underlying growth trends as still subdued enough to require more aggressive stimulus. It also suggests that inflation is not the key risk at this time, in the RBI's view."
KUNAL SHAH, DEBT FUND MANAGER, KOTAK LIFE INSURANCE, MUMBAI
"It is a positive surprise but some growth worries have also been recognised by RBI. It is overall positive for growth and markets. This is the first time RBI has said that it wants to keep real rates benchmarked to 1-year treasury bill. The 10-year benchmark bond yield may fall to 7.50 percent. The absence of monsoon fears is also another positive on food inflation."
BACKGROUND
* The Reserve Bank of India is expected cut its key repo rate to a four-year low on Tuesday to help support the domestic economy at a time when consumer inflation is at a record low, but may express caution about easing further as price risks still loom.
* The Reserve Bank of India is likely to cut interest rates for the fourth time this year at a policy review next week, as falling energy prices have cooled inflation and the economy has slowed, a Reuters poll showed.
* Indian growth slowed by more than expected in the quarter to June, a setback for Prime Minister Narendra Modi that will prompt more urgent calls from his aides for interest rate cuts.
* India's inflation dived to a new low in August, helped by falling global commodity prices, bolstering prospects of an interest rate cut by the central bank later this month.
* Indian Finance Minister Arun Jaitley is stepping up pressure on the central bank to cut rates as the economy struggles and price rises slow, with some bureaucrats working behind the scenes to argue for an immediate cut of as much as 50 basis points.
* Though the Reserve Bank of India is expected to cut interest rates next week by a quarter percent to a four-year low, officials say concerns over prices make it likely to resist political pressure for significant easing in the coming months.
* A top adviser to Prime Minister Narendra Modi called on Thursday for cuts in interest rates to boost India's sluggish economy, putting pressure on the country's cautious central bank ahead of a policy review later this month.
(Reporting by Mumbai Treasury Desk; Editing by Sumeet Chatterjee)