MUMBAI (Reuters) - The Reserve Bank of India kept interest rates unchanged at 8.0 percent on Tuesday as widely expected, staying focused on containing inflation while adopting a more dovish tone in response to the government's call for help to revive economic growth.
COMMENTARY
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI
While governor Rajan's contention has been that money market and bond yields have come down, so lending rates from banks should also follow suit. But it is difficult to believe that will happen without RBI sending a signal in that direction. Policy rates remain at elevated levels and are aimed at controlling aggressive credit disbursals, so as to keep inflation in check. It is also good to know that RBI has been in talks with the government to frame up the contours of the monetary policy framework, although we do not know any major details about it as yet.
(Click http://in.reuters.com/article/2014/12/02/india-economy-rates-idINKCN0JF38720141202 to read Reserve Bank leaves rates on hold, may cut early 2015)
RADHIKA RAO, ECONOMIST, DBS, SINGAPORE:
The RBI did not relent to market pressure and opted to keep rates unchanged. The policy language has turned neutral as risks to the FY16 target are now seen as evenly balanced, but policymakers were quick to add that durability of readings beyond December will be watched.
We interpret these statements to signal that a decision to lower rates will be data-dependant given the uncertainty over the trajectory for crude prices and challenging fiscal outlook. More importantly, the RBI is wary of policy flip-flops and highlights that if and when the policy direction shifts, the subsequent action needs to be consistent with the changed course.
Hence, further clarity on price outlook will be preferable as base effects fade in first quarter next year. Nonetheless, the door for rate cuts has been left open and is likely to see the market shift rate cut expectations to February's review.
SANDEEP NANDA, CHIEF INVESTMENT OFFICER, BHARTI AXA LIFE INSURANCE, MUMBAI
The policy has come in line with market expectations. There is no rate cut but guidance is definitely dovish. People will now expect rate cuts from February onwards. RBI has brought down its expectations to market's level. More positive surprises can be expected given the way commodity prices are behaving.
ARVIND CHARI, HEAD OF FIXED INCOME AND ALTERNATIVES, QUANTUM ADVISORS, MUMBAI
We have maintained that the RBI will only move post certainty on growth polices and supply reforms in the budget. We thus expect the first rate cut to be immediately post-budget in the first half of March and it can be a 50 basis point cut.
KILLOL PANDYA, SENIOR FUND MANAGER-DEBT, LIC NOMURA MF
RBI's policy is very balanced and pragmatic. There should be no complaints from market participants. The policy is dovish relatively so there would be continued expectations of rate cuts in future. The trajectory would remain dovish but government's needs to do its part.
R.K. GUPTA, MD, TAURUS ASSET MANAGEMENT, NEW DELHI
This is what we were expecting. Probably rates may not be reduced before April 2015. Reducing 25 basis points is not going change anything in the corporate sector. If inflation continues to remain low, foreign currency reserves remain comfortable, current account deficit remains under control, probably you can expect a 50-75 basis point cut in April 2015, after the budget. RBI will take a very, very cautious approach.
SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK CAPITAL, MUMBAI
Today's action is aimed at containing the medium-term inflationary pressure and is well in line with the RBI's sanctity towards its previous tone. However, the tone for today's policy seems more softer on account of positive developments happening to the intermittent data points. The prolonged low price regime seen in international crude and the government's effort in containing the fiscal deficit would weigh positive in forthcoming policies of 2015 and might lead to a first rate cut in the first quarter of 2015.
DEVENDRA KUMAR PANT, CHIEF ECONOMIST AND SENIOR DIRECTOR, (HEAD-PUBLIC FINANCE), INDIA RATINGS AND RESEARCH
The policy has come in line with our expectations. There are high chances of a rate cut in Feb 2015. Decline in inflation has come mainly from falling crude oil prices. Oil prices will remain low but may not see a sharp fall next year. Food inflation may also rise due to summer pressure. Base-effect will keep inflation lower until December.
J. VENKATESAN, EQUITY FUND MANAGER, SUNDARAM AMC, CHENNAI
The central bank has made a strong dovish statement. Inflation is clearly trending downwards, and based on that the RBI has clearly stated that the monetary stance will be reviewed early next year. If the interest rate is cut it would be sentimentally beneficial, but things will not pick up just because of rate cuts. A strong reforms push is needed to revive economic growth, that is where the cycle had got stuck.
A. PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP LTD, MUMBAI
This policy is as per expectation. The guidance is dovish which leads us to believe that there is a significant chance of policy easing by February subject to inflation and government's efforts to meet fiscal targets. At this point we'll go with 25 basis points. The bond market is running ahead, but there's more conviction about policy easing by February.
KUMAR RACHAPUDI, SENIOR RATES STRATEGIST, ANZ, SINGAPORE
The RBI assessing the risks to its January 2016 inflation forecast as 'balanced', previously the risks were biased upside, is significant. In fact, the RBI said if the current inflation momentum and changes in inflationary expectations continue, a change in the monetary policy stance is likely early next year. Think this paves way for a rate cut in early 2015 unless global commodity prices aggressively reverse their fall. We like staying long Indian bonds here.
SANDEEP BAGLA, ASSOCIATE DIRECTOR, TRUST GROUP
The change in stance by RBI is very heartening. The easing of commodity prices has meant that the central bank has room to cut rate by around 75 bps for the next full year. Market has tried to price in this possibility by rallying strongly. There's a good chance that the 10-year yield will fall to 7.90-7.95 in the immediate term.
R. SIVAKUMAR, HEAD OF FIXED INCOME, AXIS ASSET MANAGEMENT, MUMBAI
Clearly, a very dovish statement by the governor; they have acknowledged that inflation is treading expectations and that there is scope for monetary easing in early 2015. Markets like clarity and they are reading this as a signal that barring any surprises, a Feb 2015 rate cut looks likely.
BACKGROUND
- India's annual infrastructure output growth accelerated to 6.3 percent in October, driven by pick up in coal and electricity generation, government data showed, indicating an improvement in economic activity.
- Gross domestic product expanded 5.3 percent in the July-September quarter from a year earlier as a manufacturing slump took the bounce out of Asia's third-largest economy. Growth in the previous quarter was at a 2-1/2 year high of 5.7 percent.
- India has scrapped a rule mandating traders to export 20 percent of all gold imported into the country, a surprise move that could cut smuggling and raise legal shipments into the world's second-biggest consumer of the metal after China.
- The Indian government plans to raise about 891.2 billion rupees ($14.4 billion) by reducing its stakes in state-run banks to 52 percent, the junior finance minister said.
- India could give banks more flexibility to restructure distressed loans in a bid to steer funding towards cash-strapped infrastructure projects, Reserve Bank of India (RBI) Governor Raghuram Rajan said.
- The wholesale price index rose an annual 1.77 percent last month, its slowest since September 2009, compared with the 2.20 percent forecast by economists in a Reuters poll.
- Retail inflation, which the RBI tracks in setting lending rates, slowed to 5.52 percent in October from a multi-year low of 6.46 percent a month earlier, helped by slower annual rises in food and fuel prices.
- India raised the minimum capital requirement for so-called shadow banks and tightened rules on deposits and bad loans to avoid any potential risk to the economy from these rapidly growing finance firms by regulating them like traditional banks.
(Reporting by Mumbai Treasury Desk; Editing by Bengaluru Desk)
