The Reserve Bank of India (RBI) on Monday left interest rates unchanged but cut the cash reserve ratio for banks, saying the primary focus of monetary policy remains fighting inflation, days after the government unveiled a spree of reforms to boost growth and improve its fiscal position.
The RBI left the policy repo rate at 8 percent, in line with expectations in a Reuters poll on Friday before the government unexpectedly announced measures to allow foreign direct investment in industries including supermarkets and airlines.
The RBI cut the cash reserve ratio, the share of deposits banks must keep with the central bank, by 25 basis points to 4.5 percent in a move it said would inject about 170 billion rupees of liquidity into the banking system.
COMMENTARY
RAJEEV MALIK, SENIOR ECONOMIST, CLSA, SINGAPORE
"I think the RBI was correct in leaving the repo rate unchanged, as it had already anticipated some action from the government when it had announced a 50 basis point cut in April. The cut in CRR looks like a reluctant move, essentially to pat the government for its constructive action.
"The RBI is still focused on managing inflation. Future moves will be a function of how the government sorts out the fiscal mess, since there has to be a lot of follow-through of the measures that were recently announced. A rate cut today would have made the RBI a laughing stock given that inflation is high, rising and will rise more, and it is already above the RBI's forecast."
ROBERT PRIOR-WANDESFORDE, ASIAN ECONOMIC RESEARCH DIRECTOR, CREDIT SUISSE, SINGAPORE
"I think the Reserve Bank of India's decision not to cut the repo rate is perfectly in line with what they have been suggesting.
"The recent measures taken by the government are necessary for the economy, but probably not sufficient for a rate cut. And in any case, the last thing the RBI wanted is the measures being withdrawn after it eased rates. Hence a rate cut today looked unlikely.
"We think there is a slightly more than 50 percent chance of a 50 basis point cut in the repo rate in October.
"The cut in cash reserve ratio is a signal of the RBI's dovish intent, and also an acknowledgement of the commercial bank's demand for lower CRR."
RADHIKA RAO, ECONOMIST, FORECAST PTE, SINGAPORE
"By keeping the repo rate unchanged RBI stood by its tough rhetoric on inflation, especially in the light of immediate upside risks to the inflation gauge -- mainly from potential rebound in global commodity prices in wake of U.S. Fed stimulus moves and first/second tier impact from the recent diesel hike.
"There is also a risk that the government's reform agenda could be hindered by implementation delays and rollbacks, especially amid heightened political repercussions. On the CRR cut, we see the move as a possible compromise and a pre-emptive move to boost liquidity (ahead of advance tax payouts)."
KAUSHIK DANI, FUND MANAGER, PEERLESS MUTUAL FUND, MUMBAI
"The quantitative easing in the United States may firm up the commodity prices and that would further fuel the domestic inflation. So, the central bank would wait and see the actual data on inflation before doing anything noteworthy. If the core inflation softens for two consecutive months, then that would provide the first trigger for a repo rate cut."
JONATHAN CAVENAGH, CURRENCY STRATEGIST, WESTPAC, SINGAPORE
"I suspect the RBI still wants to see inflation pressures move lower before easing policy further. This is also the risk that the recent round of government reforms could come unstuck if opposition in India is strong enough (although this seems unlikely given how weak the growth outlook is at present).
"The CRR cut will add liquidity to the system and is a positive for the growth outlook at the margin. Overall there may be some disappointment after today's RBI announcement but I would still expect any USD/INR bounce to be sold into, particularly after the positive reforms announced around FDI and diesel prices etc. The market has been starved of good domestic news out of India for a long time, hence the positive sentiment in recent sessions can run further in our view."
SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI
"With the CRR cut and likely 200 billion rupees of OMOs (open market operations) every month from October, it should bring the banking system to surplus liquidity. That is equivalent to a 100 basis points cut as the reverse repo rate will be the operational rate.
"I see about 50 basis points cut in market lending rates in the next 45 days. We may see another 25 bps CRR cut in October. I expect inflation to top out at 8.5-9 percent by December and collapse from February. That is when the RBI will have a big elbow room to cut the repo rate."
UPASNA BHARADWAJ, ECONOMIST, ING VYSYA BANK, MUMBAI
"CRR cut by the RBI is likely to prompt the banks to pass on lower lending rates and deploy resources towards productive sectors. Going forward, RBI's stance on repo rate is likely to be dependent on the growth-inflation dynamics. With the remedial measures already been announced by the government, RBI may consider a policy rate cut in the quarterly review meeting in October."
SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI
"The RBI did hold its ground by refraining from a rate cut today keeping in view the persistent inflationary pressures. However, the guidance seems to suggest that with the positive outcomes of the slew of measures announced by the government in the coming months, the RBI is expected to complement with a rate cut.
"We believe that beginning October 30, the RBI is likely to front-load rate cuts and we see 50 basis points cut during October-December."
INDRANIL PAN, CHIEF ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI
"Today's rate decision shows that macro-economy rules over market-economy. It shows that ultimately the fundamentals are determining the Reserve Bank of India's action. This is a great move from the RBI, and re-established the credibility of the RBI as an independent central banker, given that the inflation dynamic looks hazy and on the higher side."
GAJENDRA NAGPAL, CEO, UNICON FINANCIAL INTERMEDIARIES, NEW DELHI
"Given the announcements in the last few days, I did start believing that the RBI will surprise us by cutting the CRR, which is what has happened. RBI is fighting a lone battle against inflation. One can argue that inflation still remains stubbornly high and substantial easing is not possible. I think this is a reasonably prudent move, which will add to liquidity in the system."
SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK CAPITAL, MUMBAI
"The unchanged repo rate is broadly in conformity with the ongoing higher inflationary threats. Though the liquidity situation has improved considerably, the impact of CRR cut is expected to see a downward re-pricing in the lending rates, thus smoothing out the anticipated credit demand in the coming months.
"The long awaited reform announcements though a big feel good, the implementation of the same would hold the key while it comes to a front loading rate cut (repo) decision in the quarter two policy meet. We expect a 50 bps rate cut for FY 13 from here."
R.K. GUPTA, MD, TAURUS MUTUAL FUND, NEW DELHI
"The market might see a knee-jerk reaction to begin with, but on a long-term basis the decision is positive and there is a clear message that RBI is an independent body and is not coming under the government's pressure. The decision is an image boosting act by the central bank."
JAGANNADHAM THUNUGUNTLA, STRATEGIST, SMC GLOBAL SECURITIES, NEW DELHI
"No repo rate cut indicates that the RBI is still concerned about the inflation and until and unless the inflation comes down to comfortable levels, there won't be any immediate move on that front. However, the government's recent steps towards fiscal management have given some room to the central bank to adopt a liberal monetary policy."
A. PRASANNA, ECONOMIST, ICICI SECURITIES, PRIMARY DEALERSHIP LTD, MUMBAI
"The RBI felt compelled so they have chosen the least harmful way of responding by a token CRR cut. I think what the statement is telling us is that the RBI is still worried about inflation, although it's more hopeful of government steps that over the medium term inflationary pressures will come down. In the near term, however given the pressures on inflation, scope for a rate cut in the next policy continues to be low.
"The bond market has been in a range, and the 10-year yield is likely to move in 8.10-8.30 percent for the next one month."
ARUN KEJRIWAL, STRATEGIST, KRIS, MUMBAI
"The CRR cut was marginally unexpected and is probably a continuation of the feel-good factor of the last few days. I don't think any sector is starving for funds from banks. For retail sectors, like consumer goods and housing that need maximum funding, the only concern is reduction in interest rates. What has been done over the last few days is a tactic to divert attention from the coal scam and criticism that the government is not doing anything."
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI
"RBI's policy move today clearly shows that inflation management remains its priority. A marginal reduction in CRR is pre-emptive as RBI sees some strains on liquidity going forward on account of widening gap between deposit and credit growth."
MARKET REACTION
The rupee was trading at 53.76/77 per dollar as of 0537 GMT, weakening from around 53.71 levels before the RBI announcement, although still stronger than its 54.30/31 close on Friday.
The 10-year bond yield rose 5 basis points to 8.17 percent from beforehand and was down 1 bp on the day.
The one-year swap rate rose 8 bps to 7.68 percent from levels before the decision, according to traders' quotes, though the rate was still down about 5 bps from Friday's close.
The BSE Sensex trimmed gains to 0.77 percent from gains of around 0.9 percent before the RBI decision.
BACKGROUND
- After months of dithering on the economy, India's beleaguered government roared back to life in dramatic fashion on Friday, announcing big bang reforms as part of package of measures aimed at reviving growth and staving off a ratings downgrade.
- There were quiet celebrations in the offices of Prime Minister Manmohan Singh late last week after he stunned the country with a slew of steps to revive the tanking economy.
- The wholesale price index (WPI) rose a higher-than-expected 7.55 percent in August from a year earlier, mainly driven by higher food prices due to deficient monsoon, government data showed on Friday.
- The government raised the price of heavily subsidised diesel on Thursday to rein in its fiscal deficit and counter the threat of becoming the first of the big emerging economies to be downgraded to junk.
