The Reserve Bank of India left interest rates unchanged in its policy review today but cut the cash reserve ratio for banks and indicated it may ease monetary policy further in the March quarter, although inflation remains a near-term concern.
Here is what experts had to say about the RBI's move:
A Prasanna, ICICI Securities, Mumbai
"The market was positioned for a rate cut, but a cut in CRR delays the beginning of open market operations (OMOs). There's a positive that RBI has said there's a likelihood of easing in the Jan-March quarter. Looks like RBI wants inflation to peak out before cutting rates so we shouldn't expect anything in December. We expect a 50 basis points cut during Jan-March."
Radhika Rao, Forecast Pte, Singapore
"RBI stood by its tough anti-inflation rhetoric by opting not to lower the key policy rate though preferred to trim the CRR as a step to lower funding costs and possible compromise. A rate cut in the face of jump in September WPI, sharp upward revision to historical numbers and recent rebound in the proxy core inflation measure, might have put the bank's inflation-fighting credibility at risk.
"Notably there appears to be some sort of policy guidance, as RBI expects inflation to ease in Q4 2013, priming the markets to lower expectations of an imminent rate cut. We maintain our call for 50 bps more cuts by FY13-end."
Shubhada Rao, Yes Bank, Mumbai
"The policy is in line with our revised outlook post yesterday's fiscal consolidation plan. While current inflation is worrisome, going forward, it could provide some comfort. The stance of monetary policy is shifting towards supporting growth and maintaining comfortable liquidity to provide for the credit needs of the economy.
"And, as the government measures continue to unfold, we believe the RBI will continue to support growth with a rate cut. We're still expecting 50 bp rate cut during Jan-March, with inflation likely to peak in December."
Kilol Pandya, Daiwa Mutual Fund, Mumbai
"I was expecting a 50 basis points cut in the CRR. The policy is in line with what the RBI has been saying. While it has raised the inflation projection and cut growth estimates, it has held out hope for a rate cut in the next calendar year. I expect the 10-year yield to hold in the 8-8.25 percent range."
Jagannadham Thunuguntla, SMC Global securities, New Delhi
"For the central bank, inflation is the main anchoring point and that has been the case all along. I don't think they will do much in the next couple of quarters as inflation is not going to come down any time soon.
"Now they are coming closer to the reality in terms of the GDP growth."
Dariusz Kowalczyk, Credit Agricole CIB, Hong Kong
"Such outcome is in line with consensus, but there was a strong minority expecting a rate cut, so its lack should move markets: hit the INR (growth will take longer to rebound with high rates) and trigger paying flows on the INR OIS curve (it could steepen as gains in long end should be larger given that short end should be somewhat anchored via improvement of liquidity after CRR cut)."
Deven Choksey, KR Choksey, Mumbai
"If a CRR cut is not backed by a rate cut it doesn't make sense and this is unlikely to be reviewed before December. By sending more liquidity into the system the RBI is trying to ask banks to take the pressure. The excess liquidity will go towards projects, banks will be pressurised to lend but buyers might not feel confident about spending after borrowing at high rates. You have to allow expenditure to take place in the system so there is infrastructure development which will kick-start the economy."
Dinesh Thakkar, CMD, Angel Broking
“Markets are likely to be slightly disappointed since they were largely factoring in a reduction in CRR and the Reserve Bank has delivered on those lines, so there are no positive surprises. By maintaining the repo rate, the Reserve Bank has reiterated its stance on inflation management since upside risks to inflation continue to persist. I believe that high food prices, the pass through effect of fuel price hikes and sticky core inflation are likely to keep inflation elevated until December and I maintain our expectation of a 25 - 50 bps rate cut towards the end of fiscal year.”
S S Mundra, Executive Director, Union Bank of India
“Alongwith a cut in CRR, we were also expecting 25 bps reduction in policy repo rate. This could have given us more room for passing on the rate benefit to borrowers, particularly on retail and SME side. However, RBI has done a balancing act by creating further opportunities for lending to productive sectors without diluting its stance on inflation expectations. It is positive that growth-inflation trade-off is gradually shifting towards the former and it bodes well for banking sector. Though monetary action is largely on expected line, quite a few announcements are positive for banking sector. This includes harmoniSation of definition of infrastructure sector, further relaxation in branch authorization policy, etc.”
R. V. Kanoria, President of FICCI
“The reduction in CRR by 25 basis points, while leaving the policy interest rate untouched, reflects that inflation remains a near-term concern for the RBI. FICCI believes that while a reduction in interest rate is imperative to revive investment growth, there would be some leeway now for banks to lend more to the productive sector via the CRR cut.”
Anshuman Magazine - Chairman and Managing Director, CBRE South Asia Pvt. Ltd
"The RBI’s decision to keep the key policy rates unchanged once again is a disappointment for the real estate sector. While a cut of 25 base points in the CRR Rate does infuse some liquidity, a reduction in the repo rate would have helped boost investor sentiment. The festive season coupled with an expected change in policy rates would have been the ideal time for improving consumer confidence."
Ashvin Parekh, National Leader - Global Financial Services, Ernst & Young
"Inflationary pressures continue to have a stronger effect on the monetary policy, forcing the regulator to persist with the wait and watch policy. Overall inflation increased marginally in September and is expected to remain at current levels in the 3rd quarter. While the RBI revised its year-end target for inflation and GDP growth, persistent inflationary pressures remain in the economy and the current growth inflation dynamics is likely to continue for another quarter.
The banking sector credit as well as deposit growth has slowed substantially to 13.7% and 12.3% as on October 5, 2012. The CRR cut will help in easing the liquidity deficit which shot up in the past fortnight. While the current account and fiscal deficits remains a concern, the RBI may need to think of ways to prop the credit growth in the fourth quarter. Additionally announcements on the new banking license guidelines, WOS for foreign banks and holding companies were expected in the policy review".
Sandeep Nanda, Chief Investment Officer, Bharti AXA Life Insurance
"As expected RBI cut CRR by 25 bps while the decision to keep policy rates unchanged seems to have disappointed markets given recent goverment actions. The CRR cut was more to preempt liquidity tightness due to the festival related currency demand. The reason for keeping repo rate unchanged due to sticky inflation and in anticipation of inflation rising in the next few months though acknowledging it to moderate in the last quarter of FY 2013.
Indranil Pan, Chief Economist, Kotak Mahindra Bank
"Today’s policy clearly indicates the clarity of thought at the RBI – unless twin deficit risks for India come off significantly, it could continue to be difficult for the RBI to bring down repo rate. They will in the interim work on the monetary policy through CRR yet remaining mindful that the operative rate does not come down to the lower end of the corridor. Effectively CRR reduction will also boost reserve money, a need of the hour if baseline growth has to be maintained at 5.8%. RBI makes it most apparent in its guidance that the current trajectory of inflation should indicate a rise, before easing in the last quarter of the financial year. In this context, “further policy easing” is likely only in the 4th quarter. In this context we continue to stick to our long-held view that a repo rate easing could happen only in the 4th quarter of the FY. We also stick to our view of a 50 bps incremental Repo rate cut in this FY, with end-March rate dropping to 7.50% from 8.00% now".
Lalit Kumar Jain, CREDAI National President
“The cost of funding of Real Estate is very high and the home buyers as well as developers expect the RBI to come out with positive policy and facilitate drastic reduction in interest rate. We have been pointing out that the real estate industry is not only the 2nd largest employer in the country but also contributes handsomely to the GDP and growth of 400 other industries”.
Y M Deosthalee, CMD, L&T Finance Holdings Limited
"Despite continuous prodding by the Government and Industry, RBI chose to keep the Repo Rates unchanged. RBI has clearly demonstrated its independence and has not succumbed to pressures. It is a clear indication of the fact that the pressures of inflation have not yet abated leaving little room for RBI to reduce the rates. Global risks have heightened amidst a slowdown and revival in domestic growth hinges on efficient implementation of the reforms announced by the Government.
"However, considering the tight liquidity situation which has emerged over the last few days, the Regulator has cut CRR by 25bps. This would release Rs.17,500 crore in the system which would bring down the liquidity deficit in the range of Rs.50,000-75,000 crores, which appears to be the comfort zone of RBI."
Shyam Srinivasan, Managing Director & CEO, Federal Bank
"CRR cut of 25 bps would release Rs 17,500 crore in the system. Even if deployed at average 10 per cent or so, would add Rs 1,750 crore annual to the bottom line of the banking system. Being festival season, the currency with public will increase and this cut may not be sufficient to meet the deficit. One can expect OMO buying of G-Secs also in the near future.
"Bank financing for buying gold has been banned. It s a very progressive move and would help preventing the bubble formation. Else, it could have resulted in bank loans being used to buy an unproductive asset, which again could have been pawned to raise further resources to buy more gold and so on."
S Mahalingam, CFO& Executive Director, TCS
The policy announcement is consistent with RBI's stance and is focused on controlling inflation. Like the past policy announcements, two things are consistent-- inflation rate forecast going up and GDP growth forecast down. This policy again has done the same, inflation rate has been revised upwards to 7.5% from the 7% earlier, and GDP growth forecast downwards to 5.8%. While many countries may see a growth of 5.8% in GDP as a respectable figure in the present recessionary times, but the deceleration of economic activity in India is still a concern. If growth stalls, obviously it will lead to continuous fall in Rupee exchange rate.
Dr Habil Khorakiwala, Founder Chairman and Group CEO, Wockhardt Ltd
High on rhetoric and low on delivery is what I would call the recent Reserve Bank of India (RBI) credit policy. Slightly disappointing, especially when the announcement is coming on the back of big-bang Union Cabinet reshuffle and with hopes of Finance Minister suggesting that everything is on track or it will be on track soon.
I am not very well versed with banking and the financial jugglery but what I understand – like any common man – is that RBI has released Rs 17,500 crore in the banking system by way of 25 basis point cut in the cash reserve ratio (CRR). This means that there will be more and cheaper money for lending purpose, more and cheaper money in the hands of businesses and individuals and hence the expected result is some sort of stimulus to the economy.
Ravneet Gill - Chief Executive Officer - Deutsche Bank, India
Today's policy decision by the Reserve Bank of India is constructive. While the RBI is encouraged by the Government's recent measures aimed at fiscal consolidation and improving the investment environment, it is waiting to see progress with respect to structural improvements prior to effecting a rate cut. At the same time, to facilitate flow of credit to productive sectors, it has cut CRR.
We agree with the RBI's assessment that inflation momentum remains strong, even beyond the fuel price adjustment related rise in prices seen in September. Our tracking of a large number of items shows that during the month of October the price trend was generally favorable for food and unfavorable for non-food goods. Inflation could ease in the future, however, the evidence or indication of such respite is scant at this juncture. How that landscape evolves shall determine the timing of the first rate cut in this cycle.
A Mahendran, managing director, Godrej Consumer Products Ltd (GCPL)
The monetary policy announced today has been disappointing. The expectation of a repo rate cut has not happened. I am certainly not happy with this. From a corporate point of view, companies are looking for support, which is not in sight at the moment. While the central bank's concerns regarding inflation are valid, at the same time there is need to boost investment.
With cost of finance still high, I see the lull in corporate investments persisting for a while. In my view, this is certainly not a very good sign. How do you kickstart growth when there is no investment happening? This issue will have to be addressed at some stage.
