Dovish, but another hike isn't off the table: Citi, HSBC after RBI keeps rates unchanged

Written by ENS Economic Bureau | Mumbai | Updated: Jun 4 2014, 14:33pm hrs
Raghuram RajanFor the second time RBI Governor Raghuram Rajan has kept rates unchanged.
For the second time RBI Governor Raghuram Rajan has kept rates unchanged, belying hopes of any reduction in EMIs for loans. Commenting on the move, agencies gave out varied views. Excerpts:


Terming the RBI guidance on inflation dovish, Citi said, The political intent to address inflation opens up space for monetary easing in 2015, adding that it may be possible if the Centre takes steps to better food procurement, calibrate MSP hikes

* Leaving repo rates unchanged will free up credit for private sector

* In the medium term, the RBI is moving to a target policy rate based on 14-day term repo cut-offs

* Bonds may see the two moves as negative, but could take comfort from the possibility of easing.

* Citi expects rupee to trade in the Rs 59 to 62 band

Crisil Research

Though the base effect of high inflation during June-November 2013 could soften CPI inflation in the coming months, concerns over food inflation continue due to El Nino fears. The RBIs decision to hold rates is appropriate, said Crisil Research

* Credit growth in banking sector to improve to 16-18% in FY15 because of decisive election result

* Lending rates likely to remain high amidst concerns on asset quality and an elevated CD ratio

* NIMs may improve in FY15 by 10-15 bps with better demand and re-pricing of high rate deposits


While reiterating its goal of bringing headline CPI down to 8 per cent by January, the RBI has noted that the risks around this target remain balanced. However, according to HSBC, while all depends on the upcoming Budget and rains, accelerating demand, amid still constrained supply potential, may prevent inflation from falling as quickly as hoped. Another hike isn't off the table, it said.

* The government's supply-side reforms may lift the economy's growth potential over time, allowing it to grow faster without fanning price pressures

* But it'll take time for these to bear fruit. So, for now, a fine balance must be struck to maintain a glide path of retail prices to 8%

* A stringent Budget is needed that dampens near-term spending impulses, while laying the ground for a future recovery

* Another rate hike may well be warranted, especially if the government doesn't tighten the fiscal reins as promised