1. Raghuram Rajan’s RBI cuts rate: Expectations rise for more

Raghuram Rajan’s RBI cuts rate: Expectations rise for more

Raghuram Rajan-led RBI today decided to cut the benchmark interest rate by 0.25 per cent to 7.75 per cent with a view to boost economic growth.

By: | New Delhi | Updated: February 3, 2015 12:14 PM
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Households’ inflation expectations have adapted, and both near-term and longer-term inflation expectations have eased to single digits for the first time since September 2009: RBI Governor Raghuram Rajan on cutting the repo rate. (Reuters)

Encouraged by softening inflation, the Governor Raghuram Rajan-led RBI today decided to cut the benchmark interest rate by 0.25 per cent to 7.75 per cent with a view to boost economic growth.

The decision to reduce repo rate comes a fortnight ahead of the scheduled date of monetary policy announcement on February 3.

“It has been decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 8.0 per cent to 7.75 per cent with immediate effect,” Reserve Bank said in a statement today.

The RBI has been keeping the benchmark interest rate at elevated level at 8 per cent since January 2014.

Here are some reactions:

FICCI President, Jyotsna Suri
We welcome RBI’s move to cut repo rate by 25 bps, ahead of the monetary policy meeting. FICCI has been advocating for a rate cut, as cost of finance is an important factor for giving boost to the industrial sector, which has been under stress for a long time now. This measure will help in improving the investor sentiment. FICCI hopes that this will be the beginning of further cuts in the policy rate by the Central Bank, and will enable its transmission into lower lending rates by the Banks.

Shanti Ekambaram, President – Consumer Banking, Kotak Mahindra Bank
In an “ ahead of policy” measure the Central Bank cut Repo rate by 25 bps. This has been long awaited by all constituents of markets and industry. The recent sharp fall in crude prices, the significant drop in CPI & WPI , emerging global deflationary worries  were factors that have  perhaps prompted the rate cut. From here on the next major focus is likely to be the budget and the fiscal scorecard it presents and well as [predicts for the next  year.
This is a positive development for supporting the growth initiatives being rolled out by the government and will help in the GDP growth as we get into the next fiscal year.

Debopam Chaudhuri, VP- Research & Chief Economist, ZyFin Research:
Although this is a positive news for markets, there still remains some questions around this minute cut  on its transmission mechanism to the end borrowers. Also, the economic recovery has been shallow with no significant effects felt on the streets, suggesting banks may still be cautious. All said, the business cycle can benefit significantly if the RBI pursues this stance with further sizeable cuts and an expansionary monetary policy in the months to come.

Chanda Kochhar, MD & CEO, ICICI Bank:
The rate cut by RBI was widely anticipated and is a welcome move. Together with the various initiatives being taken by the government, the rate cut would strengthen the positive momentum in the economy by lowering borrowing costs as the lower rate regime reflects in bank funding costs over time. We need to continue to address the issues impeding output and investment in key sectors to leverage this momentum for growth.

Read StanChart Report: RBI likely to ease further
Read SBI Report: Beginning of a rate easing cycle

Also Read: Sensex soars after RBI rate cut

Arundhati Bhattacharya, Chairman, State Bank of India  on the repo rate cut by RBI:
We welcome the 25 basis point repo rate cut by RBI. With global crude and commodity prices expected to be benign, inflationary expectations moderating to single digit, the current disinflationary impetus is likely to be firmly entrenched and unwinding. We thus believe that this cut may be just the beginning of a rate easing cycle.

In pics: Check out what happened last month when Raghuram Rajan refused to cut rates

Indranil Pan, Chief Economist, Kotak Mahindra Bank Limited on rate cut by RBI:
The confidence of the RBI that the global deflationary trend would continue and that the government would be able to keep its words on fiscal consolidation has led it to move with an out-of-policy rate cut. Critically, even the inflation expectations of the households have been said to be adapted, both for the near term and the longer term. With the first rate cut done, we expect the RBI to stay on course for more cuts of 25 bps each in the near future. Key domestic events for the RBI are the Union Budget where a high quality fiscal consolidation is sought. Given that the fiscal is in order we would expect the next cut to be in the first week of March, after the Union Budget in February. The extent of the cut may still not be too deep and the extent could be capped at a cumulative 75-100 bps. RBI has to be careful of the inflation expectations if growth picks up while the savers also need to be provided with adequate real returns for the savings rate in India to rise and reduce reliance on foreign money for growth.

Check out the reactions to the poll on RBI rate cut we asked on January 14, 2015:

Sujan Hajra, Chief Economist at Anand Rathi Financial Services on the RBI rate cut:
Outlook:
1.     Do not expect any rate action on 3 Feb 15 policy.
2.     We expect the CPI inflation to hover mainly around 5-6% during 2015.
3.     We expect the FY15 fiscal deficit to be above the budgeted 4.1% of GDP. The FY16 deficit target likely to be maintained at 3.6% of GDP. This will give confidence to the RBI to do further rate cut.
4.     We expect another 25 bps rate cut in Mar-Apr 15
5.     We expect another 50 bps rate cut in 2HCY15
Impact:
1.     Interest sensitive activities especially fixed investment and leveraged consumption (mainly durables) to get boost
2.     Lower interest rates to reduce NPA, boost loan growth. Positive for financials.
3.     Despite depreciating pressures of a rate cut, high real return rates on Indian assets and expected boost in capital inflow due to the possible investment recovery should lead to modest appreciation of rupee.

Kunal Shah, Fund Manager, Debt at Kotak Mahindra Old Mutual Life Insurance Ltd.
Today’s move by RBI was on expected lines but for the timing. RBI has re-iterated that once the stance changes subsequent move will be consistent to the direction. Hence we believe RBI will ease further by 25bp by March 2015. RBI also has data on inflation expectations survey which confirms the drop to single digit future inflation expectations.
We believe that if global commodity prices remain soft and fiscal consolidation continues RBI can cut rates by another 50-75bp from current level in calendar year 2015.
Bond yields have softened and should continue to drift lower towards 7.5% in next one year if 50bp rate cuts materializes . Ball is in the court of government now to continue to do address supply side constraint, keep MSPs lower and stick to FRBM to deserve significant easing of interest rates.

Tell us how prescient you were, take the poll:

Also read:

* Lone ranger Raghuram Rajan fights for RBI autonomy amid rate cut rants

* Dec 2 meet: When Raghuram Rajan refused to cut rates

* Dec 2 meet: On interest rates, markets proposed, RBI Guv Raghuram Rajan disposed

* RBI can’t flip-flop on interest rate: Raghuram Rajan

Kumar Rachapudi, a fixed income strategist with ANZ Bank in Singapore:
In OIS – we think the flattening trend has most likely come to an end. The curve will steepen. The pace of steepening will be dependent on how aggressive RBI is.

Fund Managers:
Rate cut will force domestic investors sitting on sidelines to enter equities – fund managers

Lakshmi Iyer, Chief Investment Officer ( Debt) & Head Products, Kotak Mutual Fund
The rate cut of 25bps comes in the wake of a visibly lower CPI and the confidence in being able to achieve the targets set for future . We believe that the current rate cut heralds a shift in monetary stance and creates a case for continued rate cuts in future. Fiscal developments would continue to play a key role in the quantum and timing of future rate cuts too.

Shanti Ekambaram, President – Consumer Banking, Kotak Mahindra Bank
In an “ ahead of policy” measure the central bank cut Repo rate by 25 bps. This has been long awaited by all constituents of markets and industry. The recent sharp fall in crude prices, the significant drop in CPI & WPI , emerging global deflationary worries  were factors that have  perhaps prompted the rate cut. From here on the next major focus is likely to be the budget and the fiscal scorecard it presents. This is a positive development for supporting the growth initiatives being rolled out by the government and will help in the GDP growth as we get into the next fiscal year.

Rohit Gadia, Founder & CEO, CapitalVia Global Research Limited.
In its fifth bimonthly monetary policy review RBI governor stated that he will not wait even for the policy review meeting if he found all the factors under a comfortable situation, and here today he did what he said, and brought huge cheer to the market with a 25 basis point Repo rate cut. This rate cut comes as the very strong trigger for the market as this was the first Repo rate cut since May 2013 and the first rate cut for the year 2015, which was ahead of the scheduled date of monetary policy announcement on February 3.
After a rate cut announcement, Bank Nifty the banking share index, was up 4.2% or 789 points in early trade and touched a record high of 19410.reality stock are zoomed after this announcement on the hope that this action will certainly drag interest rate down and will help out the in reducing the interest burden on outstanding loans.

FULL STATEMENT BY RBI GOVERNOR RAGHURAM RAJAN:

Since July 2014, inflationary pressures (measured by changes in the consumer price index) have been easing. The path of inflation, while below the expected trajectory, has been consistent with the assessment of the balance of risks in the Reserve Bank’s bi-monthly monetary policy statements. To some extent, lower than expected inflation has been enabled by the sharper than expected decline in prices of vegetables and fruits since September, ebbing price pressures in respect of cereals and the large fall in international commodity prices, particularly crude oil.

Crude prices, barring geo-political shocks, are expected to remain low over the year. Weak demand conditions have also moderated inflation excluding food and fuel, especially in the reading for December. Finally, the government has reiterated its commitment to adhering to its fiscal deficit target.

These factors have significantly reduced the momentum of inflation, compensating for the widely anticipated ending of favourable base effects.

Households’ inflation expectations have adapted, and both near-term and longer-term inflation expectations have eased to single digits for the first time since September 2009. Inflation outcomes have fallen significantly below the 8 per cent targeted by January 2015. On current policy settings, inflation is likely to be below 6 per cent by January 2016.

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These developments have provided headroom for a shift in the monetary policy stance. It may be recalled that the fifth bi-monthly monetary policy statement of December had stated that “if the current inflation momentum and changes in inflation expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle”. In its public interactions, the RBI had committed to initiate the process of monetary easing as soon as data indicated that medium term inflationary targets would be met. Keeping this commitment in mind, it has been decided to:

·    *   reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 8.0 per cent to 7.75 per cent with immediate effect;

·      *  keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL);

·       *  continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to 0.75 per cent of NDTL of the banking system through auctions; and

·        * continue with daily variable rate repos and reverse repos to smooth liquidity.

Consequently, the reverse repo rate under the LAF stands adjusted to 6.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 8.75 per cent with immediate effect.

The fifth bi-monthly monetary policy statement also stated that once the monetary policy stance shifts, subsequent policy actions will be consistent with this stance. Key to further easing are data that confirm continuing disinflationary pressures. Also critical would be sustained high quality fiscal consolidation as well as steps to overcome supply constraints and assure availability of key inputs such as power, land, minerals and infrastructure. The latter would be needed to ensure that potential output rises above the projected pick-up in growth in coming quarters so as to contain inflation.

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