1. AnalystSpeak: ‘RBI action vindication of a benign inflation regime’

AnalystSpeak: ‘RBI action vindication of a benign inflation regime’

The Governor Raghuram Rajan-led Reserve Bank of India (RBI) kept interest rates unchanged at 8.0 percent...

By: | Mumbai | Updated: December 2, 2014 7:04 PM
RBI Governor Raghuram Rajan and other officials listen to a question during a news conference after the bi-monthly monetary policy review in Mumbai. Reuters

RBI Governor Raghuram Rajan and other officials listen to a question during a news conference after the bi-monthly monetary policy review in Mumbai. Reuters

The Governor Raghuram Rajan-led Reserve Bank of India (RBI) kept interest rates unchanged at 8.0 percent on Tuesday as widely expected, successfully fighting off pressure on him from PM Narendra Modi and FM Arun Jaitley, and instead 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

CHANDA KOCHHAR, MD & CEO, ICICI BANK
The policy signals RBI’s resolve to firmly contain inflation and inflationary expectations, while responding to positive developments in inflation and fiscal consolidation. The statement that a change in monetary policy stance is likely early next year if the current positive trends continue is very welcome. The economy has already received a tremendous boost in terms of sentiment and confidence. The results of government actions to energise investment activity should start playing out in the coming months. As this happens and interest rates moderate, we should see an improvement in growth going forward.

ARUNDHATI BHATTACHARYA, CHAIRMAN, STATE BANK OF INDIA
The RBI assertion of a possible change in monetary policy stance next year is a clear vindication and acknowledgement of a benign inflation regime. In fact, by advancing the inflation target of 6% to March 2015, RBI has now set out a clear message of the reversal of the rate cycle, sooner than later. With oil prices at historic lows, a stable exchange rate and strong capital inflows, the feel good factor is here to stay.

INDRANIL PAN, CHIEF ECONOMIST, KOTAK MAHINDRA BANK
The RBI has clearly signaled that space is opening up for some monetary accommodation as retail inflation has come down significantly. However, the RBI maintains caution against hurrying into a rate easing cycle as it believes that there is still some uncertainty about the evolution of base effects in inflation and also the government’s efforts to hit fiscal deficit targets. In our opinion, as the RBI is possibly seeking a bigger reassurance on the pace of deflation going forward, it would want to wait for a few more prints on inflation. The first of these would be the retail inflation for December (to be announced on 12th January). Thus the first occasion when it might have a chance to change its stance is on that date. But we think that the RBI would want to wait it out a bit further and digest the fiscal perspectives before actually easing. Overall, judging all the above, we think that the 1st/2nd week of March is the timing for the first cut by the RBI.

DIPEN SHAH, HEAD, PRIVATE PRIVATE CLIENT GROUP RESEARCH, KOTAK SECURITIES
Biggest surprise in today’s policy announcement was confirmation of a potential rate cut in 1QCY15. We believe that, RBI will look at the household inflation expectation (survey results for Dec should be known in Jan) and inflation for December (which will not have the benefit of base effect to be declared in Jan) and the trajectory of fiscal announcements on run-up to the budget and outcome of divestment, coal and telecom auctions.
The other question now is the magnitude of possible rate cuts going forward. We believe, RBI is likely to introduce Jan’17 inflation target of 5% in April’15 policy, limiting space of significant rate cuts into the year, in order to achieve 4% (+/- 2%) inflation target.

LAKSHMI IYER, CIO (DEBT) & HEAD PRODUCTS, KOTAK MF
“The central banker continued to maintain its policy stance. This was in line with our expectation. The central banker may be of the opinion that; the favorable base effect last year, rather than the actual price moderation, may be causing the CPI moderation. Having said that, the central banker has given an indication of change in policy stance (even out of schedule) was the moderation in inflation to exceed expectation. We believe that RBI may be waiting to assess the CPI inflation data which is to be released in mid-Dec. This may enable them to resolve on the nature of inflation (base effect or supply led) and provide the needed window to reproach the policy.

PARTHASARATHY, CFO, GROUP CIO, MAHINDRA & MAHINDRA
While the policy was on expected lines and the RBI’s consistent stand on policy rates is understandable, a rate cut would have been favourable. India would not have been an outlier either, as China and South Korea have led the way recently with rate cuts to stem their falling growth. We, as a country, are shooting for higher growth rates and since policy rate actions work with a lag, the RBI could have helped spur higher growth expectations, especially given the other data points on inflation, slow growth and investment. The auto industry is still looking for strong revival of demand and lower interest rates would have helped the cause. The policy promises a cut in the new year, depending on some economic variables, and we hope that this will be sooner than later, giving a much needed thrust to the “Make in India” initiative.

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI

While Governor Raghuram 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.

Read RBI Governor Raghuram Rajan’s Full Report: Fifth Bi-Monthly Monetary Policy Statement, 2014-15

RBI Governor Raghuram Rajan says don’t intend to flip-flop on policy

RBI POLICY REVIEW: HIGHLIGHTS

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.

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