RBI chief Duvvuri Subbarao said the simultaneous cut in the repo rate and the cash reserve ratio was to ensure transmission of monetary policy action into lending rates.
Here is what the experts had to say in response to the RBI acting as per their expectations:
Sandeep Nanda, Chief Investment Officer, Bharti AXA Life Insurance
As expected RBI cut Repo rate by 25 bps to 7.75%. The surprise was the cut in CRR by 25 bps to infuse liquidity into the system which has remained tight in Oct - Dec 2012 quarter.We expect wholesale funding rates to continue to decline slightly leading to some steepening of the yield curve. We expect the 10 year government security yield to move in a range of 7.80% to 7.90%.With headline inflation likely to have peaked, it seems that going forward the bias of the monetary policy would lay greater emphasis on growth. However further rate cuts would also on depend on containment of twin deficits and additional reforms by the govt. The change in the RBI's stance coupled with the recent economic policy reforms and likely fiscal consolidation in the upcoming budget makes us cautiously optimistic on equities as well
Shobhit Agarwal, Managing Director, Capital Markets, Jones Lang LaSalle India
The RBI has taken a huge positive step by announcing the above policy measures. RBI has shown commitment to improving liquidity in a cash-strapped economy by reducing the CRR further in this policy coupled with reduction in repo and bank rates.
Liquidity is expected significantly improve in the economy on the back of the reduced repo rate, CRR and bank rate. Consequently, there should be a revival in investment and growth – including in the real estate space. Industrial activity, which has been sluggish last year, should bounce back in the medium term.
Inflation should also witness some easing with at least the supply side being addressed and cost-push pressures being mitigated. The RBI’s policy is definitely a key to boosting real estate market sentiment and sending out positive signals to global investors.
Chandrajit Banerjee, Director General, Confederation of Indian Industry
At a time when slowing consumption and investment demand is derailing the growth momentum of the economy and industry, the decision of the RBI to ease the monetary policy by reducing repo rate and CRR will go a long way in reversing the downward trend, said CII in a press release issued here today.
“RBI’s decision to ease the monetary policy through a repo rate and CRR cut is a welcome step as it sends out a positive signal that the Central bank has now joined hands with the government to revive the growth momentum of the economy, which had to so far largely focused on containing inflation. Government’s continued thrust on reforms along with the downtrend in WPI-based inflation has provided necessary leg-room for RBI to maneuver its policy in favour of growth. However, CII would have been happier with a larger reduction in repo rate”, he said.
Naresh Takkar, MD & CEO, ICRA
The measures taken by the RBI to reduce both the CRR and the repo rate by 25 basis points are supportive of economic growth and would benefit interest-rate sensitive sectors such as automobiles, housing and the MSME segment. Based on the guidance provided by the RBI and our expectation that wholesale inflation would average 6.5-7.0% in FY14, we expect the space for further monetary easing to be limited to 75 basis points by September 2013.
This in conjunction with a normal monsoon would support consumption demand, which should allow for a moderate revival in economic growth to 6.5% in the coming fiscal year. A broad-based revival of the investment cycle, however, remains contingent upon concrete policy measures to ensure ease of land acquisition, availability of reasonably-priced power for industrial use and pick up in infrastructure spending to remove critical bottlenecks.
Abhishek Goenka, Founder & CEO, India Forex Advisors
The most awaited monetary policy review is out and the RBI has acted in lines with the expectations. The RBI was expected to take a growth stance considering the series of growth reforms undertaken by the government since September 2012.
RBI cut repo rate and CRR both by 25bps. Repo rate was kept unchanged at 8% since April 2012. Repo rate now stands at 7.75% and CRR at 4%. CRR cut will infuse the liquidity worth Rs.18,000cr in the system.
RBI holds its concern over inflation and current account deficit. It reduced its target for inflation to 6.8% from 7.5% for March quarter. It says large fiscal deficit will crowd out private investment and widening current account deficit problem will persist.He also shows concern on short term flows financing the current account deficit. We personally feel that rupee may not appreciate much and 53.00-53.20 will still remain the base with the ultimate target of 54.50-55.00 levels in this quarter.
Dinesh Thakkar, CMD, Angel Broking, Mumbai
The 25 bp CRR cut alongside the expected 25 bp reduction in repo rate is a positive surprise. Inflation has moderated and likely peaked and the government has also taken a number of credible measures to narrow the fiscal deficit. So put together these factors are expected to augur favorably for the interest rate environment and investment revival in the economy. Overall, I believe that interest rates have peaked and with the reform momentum continuing and economic growth expected to improve in FY2014, the outlook for markets going ahead is positive.
Naina Lal Kidwai, President, Ficci, Mumbai
FICCI welcomes RBI’s decision to finally cut the repo rate as well as CRR by 25 basis points. This will hopefully help in reversing the anaemic Industrial growth observed over the last year, said Mrs Naina Lal Kidwai, President, FICCI. In fact the high borrowings under the LAF window seen in the recent past clearly reflected the tight liquidity situation. Release of Rs 18000 crores with CRR cut of 25 basis points will help in easing the funds flow situation. In the recently conducted FICCI Economic Outlook Survey participants also advocated the need to cut the repo immediately by 25 basis points and reduction by 75 basis points to 100bps in repo rate through FY14 if the economic growth has to be brought back to the higher growth trajectory.
Indranil Pan, Chief Economist, Kotak Mahindra Bank, Mumbai
In my opinion, RBI delivered a very balanced policy. As expected, they chose the calibrated path of a 25 bps cut in the Repo and the Reverse Repo rates as they wanted to avoid a repeat of April 2012 when the RBI had cut the Repo rate by 50 bps and then had to pause with surprises creeping in from the inflation side. On the other side, there is a clear acknowledgement from the RBI that demand side activity has remained low, growth has slowed below trend, probably needing the RBI to complement the reforms measures recently taken by the government.
However, RBI continues to toe the cautious line on inflation, CAD risks and indicates that the room to cut rates could be extremely limited. The problem for the RBI is also that it has started its rate cutting cycle at a time when most other economies of the world are finished with the cycle, were on a pause, and now are looking forward to again hiking rates. Consequently, any aggressive rate cutting cycle could prove counterproductive as capital flows would be pared and the high CAD could then manifest into a currency depreciation bias, which in itself would again lead to inflation pressures. We now look for the RBI to reduce the Repo rate by a further 50 bps in the rest of CY2013”.
Vivek Mahajan, Head, Research, Mumbai
The policy was largely in line with market expectations. As a result of a 25bps reduction in the CRR, around Rs.180bn of primary liquidity will be injected into the banking system. Going forward, the RBI has indicated that there is an increasing likelihood of inflation remaining range bound around the current levels going into 2013-14, which provides space, albeit limited, for monetary policy to give greater emphasis to growth risks. On the liquidity front, the RBI commented that, it would continue to manage liquidity to ensure adequate flow of credit to the productive sectors of the economy.
Commenting on guidance, the RBI said that, initially there was a pause in the policy rate reduction stance as there were no corresponding fiscal measures/ adjustments to improve the investment climate and non-food inflation risk also persisted. Now that some of this is getting addressed, the stance is being reviewed. This perhaps gives us an indication that the RBI would further act if the current fiscal consolidation stance of the government is reflected in its Union Budget.
Overall we believe, the credit policy is positive for the markets. The cut in CRR further reduces the cost for banks. Our markets continue to look good and we remain positive going into the budget…..advise buying quality stocks with every fall in the markets.
Radhika Rao, Forecast Pte, Singapore
"It is a timely reduction in the repo rate by the central bank though markets are swiftly likely to look beyond the priced-in move and focus on the policy guidance. RBI has not abandoned its cautious stance, stressing on the 'calibrated and limited' nature of rate support hereon. Scale of rate cuts is closely tied to the government's sustained efforts to correct the twin imbalances and moderating inflation trajectory. Even as few quarters price in substantial rate cuts going forward, we see room for only 75 bps more cuts by end-year."
Jonathan Cavenagh, Westpac, Singapore
"Combined with the reasonable drop in the inflation forecast, the market is probably encouraged to belief more cuts will be forthcoming. The fiscal side will be critical though and if the RBI feels the government's reform push is slipping, rate cuts will be put on the back burner.
"Indian equities have recovered earlier losses but are only up modestly. A more decent reaction in dollar/rupee but this move is probably being helped by the broader move lower in US/Asia. Further downside in dollar/rupee is likely, although firmer support is likely to emerge around the low 53.60/high 53.50 region in terms of the spot market."
Sujan Hajra, Anand Rathi Securities, Mumbai
"The Reserve Bank of India is definitely less hawkish in its statement, and we think it will remain in the easing mode in 2013. We think they will cut the repo rate by another 50 basis points in the next five months.
"The cut in the cash reserve ratio is very positive for banks, but we think it will be the last CRR cut. However, the RBI will continue to buy bonds through its open market operation to ease tightness in liquidity."
Dariusz Kowalczyk, Credit Agricole CIB, Hong Kong
"RBI cuts rates 25 bps as expected but also, unexpectedly, lowered the CRR, providing more support to the economy than markets anticipated.
"The statement points to further, albeit modest, room for easing, as FY13 GDP growth forecast is lowered by 0.3 percentage point to 5.5% and March WPI forecast is cut by 0.7 percentage point to 6.8%. Overall, this should boost the rupee, push down G-Sec yields and INR OIS at the short end, and lead to a steepening move on the curves."
Rupe Rege Nitsure, Bank of Baroda, Mumbai
"In broader terms, monetary policy is supportive of growth. This is substantial easing of 50 basis points, the repo and the CRR together. There is definitely scope for lending rates to come down. However, further growth outlook now depends on the structural reform measures that are likely to be introduced in the Union Budget.
"The revised inflation projection of 6.8% for March is likely to be achieved provided there is no further increase in administered prices of either fuel or foodgrains."
A Prasanna, ICICI Securities Primary Dealership, Mumbai
"In terms of guidance there maybe another 25 basis points cut in the repo rate in March, but the policy is finely balanced. There are upside risks to inflation and it is not a given that a rate cut will happen in March. It may happen in May policy. But from hereon we do not expect any more CRR cuts over the next six months, the central bank would rely on open market operations."
Sriram Khattar, DLF, New Delhi
"The tangible benefits will only come in the medium term after about three to six months but it will immediately boost sentiment. Housing demand has more to do with sentiment so if that improves, demand will also improve."
JC Sharma, Sobha Developers, Bangalore
"This is a good trigger. Because the real estate sector is rate sensitive the market believes that any rate cut will help push demand. From a customer's point of view this will improve liquidity and reduce the interest burden."
