The Reserve Bank of India (RBI) left interest rates unchanged for the second time since June, in line with expectations, while cutting its growth forecast and lifting its inflation outlook as economic conditions deteriorate.
The RBI kept its policy repo rate at 8 percent and left the cash reserve ratio for banks at 4.75 percent.
COMMENTARY:
DARIUSZ KOWALCZYK, ECONOMIST, CREDIT AGRICOLE CIB, HONG KONG
"We believe that the inflation revision is more important and will make it more difficult to cut rates, but we maintain our call for a modest 50 bps in cuts later this year in the face of significantly below-target growth. Importantly, the RBI highlighted India's challenges without offering a clear path to overcoming them, which will be negative for market sentiment.
"Overall, the impact of the meeting will be improved liquidity due to the SLR cut, higher INR OIS rates and bond yields due to lower chances of rate cuts, and lower equities as a combination of weaker growth forecast and more elevated inflation call is not supportive. The INR should fall on lower chances of monetary policy stimulus due to upward inflation revision and on negative comments on growth outlook and twin deficits."
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI
"The policy is in line with expectations as the central bank has attached more weight to upside risks to inflation than to downside risks to growth.
"A reduction in banks' statutory liquidity ratio (SLR) is a wise move, as it would improve liquidity comfort for banks whose SLR is close to the limit."
SACHIDANAND SHUKLA, SENIOR VICE PRESIDENT AND CHIEF ECONOMIST, ENAM SECURITIES, MUMBAI
"By raising the inflation projection, the Reserve Bank of India is giving out a message that it will remain hawkish in the near term, unless supply-side and fiscal measures are taken.
"The cut in banks' statutory liquidity ratio is a re-assurance that the RBI will remain true to its stance of maintaining adequate liquidity in the banking system. The move takes advantage of the low credit demand at present."
SURESH KUMAR RAMANATHAN, HEAD OF REGIONAL RATES AND FX STRATEGY, CIMB, KUALA LUMPUR
"An overall hawkish stance with the bare minimum being done by RBI, particularly the SLR cut by 100 bps. The communique is targeting inflation and it is appropriate they did not cut the policy rates. GDP growth reduced is in line with our expectations that India's macroeconomic dynamics -- trend growth and C/A balance is deep in negative macro economic dynamics.
"We see further rate cuts will be measured and with inflationary pressures intact, calling for further rate cuts will remain a gamble. Any form of easing should be seen from the angle of currency softness, that will help reduce the current negative macro dynamics that India is facing."
RADHIKA RAO, ECONOMIST, FORECAST PTE, SINGAPORE
"An expected decision on the repo and CRR, with the move to trim the SLR intended to free-up funds for lending purposes and channelized into the real economy. This step could also lower corporate borrowing rates and prevent crowding out of the private sector.
"RBI meanwhile has made it abundantly clear that price stability will be in focus, especially as the effectiveness of the monetary policy signals are distorted by an expansionary fiscal stance.
"The broad strokes of the post-policy comments are broadly similar to the ones expressed in June, with pressure to build on the government to at least undertake baby-steps towards fiscal consolidation."
NIRAV DALAL, PRESIDENT AND MANAGING DIRECTOR DEBT CAPITAL MARKETS, YES BANK, MUMBAI
"The move to cut SLR is a bit of a surprise. There are only two reasons the SLR should be cut. One is if you want to allow banks greater ability to refinance in an environment of significantly tight liquidity deficit. The other reason is to encourage banks to move out of government bonds and lend more.
"In the current environment, when the credit offtake is good, and liquidity position is reasonable, there was no apparent reason to cut SLR. The cut only increases the pool of refinancing in the wake of significant supply of bonds in the coming months, and the chance of additional fiscal slippage."
A. PRASANNA, SENIOR ECONOMIST, ICICI SECURITIES, PRIMARY DEALERSHIP LTD, MUMBAI
"This policy sticks to the script in the macro-economic report. The cut in banks' statutory liquidity ratio (SLR) doesn't make a difference. Credit growth has not picked up because rates are higher for corporates, and banks have asset quality issues.
"In the short term, bond yields will go up. But everyone in the market knows there will be open market operations (OMOs). And, the RBI's heavy hand has helped bond market clear the supply year after year.
"At present, it doesn't look as if the RBI is in a position to cut rates. However, there is enough room in the second half of the year for a 50 basis points cut, but the timing is difficult to determine."
SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK CAPITAL, MUMBAI
"Today's action was no more a surprise for the market. A non-event reflects the central bank's prudent effort in controlling the inflationary expectation and leaves the growth onus in the government's hand. Further cutting down the SLR would have little impact on the overall systemic liquidity and would negatively weigh on the government securities market in the near term.
"The path of monetary easing would henceforth be guided by the pace of fiscal reforms with near-term focus on expenditure restructuring. A delayed response from the government's end might handicap the quantum of rate cut in the forthcoming policy meet."
UPASNA BHARDWAJ, ECONOMIST, ING VYSYA BANK, MUMBAI
"RBI's decision to keep rates unchanged clearly shows the growing concern on the persistently sticky inflationary pressures even as growth momentum slows down.
"We expect RBI to carefully monitor the growth-inflation dynamics going forward to change its policy stance."
ANUBHUTI SAHAY, ECONOMIST, STANDARD CHARTERED BANK, MUMBAI
"The Reserve Bank of India struck a hawkish stance in its monetary policy statement. Once again, containing inflation and inflationary expectations have been highlighted as the priority.
"On economic growth, though the moderation has been noted, the RBI sees limited role of rate cuts in stimulating growth. Overall it affirms our view that any rate cut from the RBI is unlikely in rest of 2012."
SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI
"The Reserve Bank of India is in a tight spot with growth slowing and inflation rising. The policy shows inflation remains the primary objective of the RBI, and hence the hawkish tone."
"With a cut in bank's statutory liquidity ratio announced, we expect the RBI will now do more open market operations to support the huge government borrowing."
Full Coverage: http://in.reuters.com/subjects/rbi-policy-review
Main story: http://in.reuters.com/article/2012/07/31/rbi-keeps-rates-unchanged-idINDEE86U02820120731
MARKET REACTION:
* The 10-year benchmark bond yield was last trading up 7 basis points on day at 8.22 percent, after rising to as much as 8.28 percent immediately post the SLR cut.
* The benchmark 5-year OIS rate rose 10 bps to 7.10 percent from its previous close, while the 1- year rate rose 4 bps to 7.68 percent.
* The BSE Sensex and Nifty briefly retraced losses post the policy, before falling again.
* The partially convertible rupee also briefly turned flat on the day, but fell again in line with shares to trade at 55.73 per dollar, from 55.5850/5950 at previous close.
BACKGROUND:
- The Reserve Bank of India painted a gloomy picture of the country's economy on Monday, citing both a sluggish growth outlook and persistent inflation.
- The wholesale price index, India's main inflation indicator, rose a lower-than-expected annual 7.25 percent in June, its slowest rise since January. But food prices remained elevated and consumer price inflation was at 10.02 percent in June, due to poor monsoon rains.
- Both wholesale and consumer price inflation are way above the Reserve Bank of India's comfort levels, central bank Governor Duvvuri Subbarao said on July 16. The RBI's threshold level for inflation is around 5 percent, he said.
- Production at factories, mines and utilities rose 2.4 percent in May from a year earlier, driven by manufacturing growth. The number, which was ahead of a Reuters poll forecast for an 1.8 percent increase, was the largest growth in output since February.
