Governor Raghuram Rajan-led Reserve Bak of India (RBI) held interest rates (repo rate) steady at 7.75 percent on Tuesday after easing monetary policy just three weeks ago, leaving its next move probably until after the government presents its annual budget at the end of this month.
Instead, the Reserve Bank of India cut the statutory liquidity ratio (SLR) – or the amount of bonds that lenders must set aside – by 50 basis points to 21.5 percent of deposits from the two-week cycle starting on Feb. 7 in a bid to spur banks to inject more credit into the economy.
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Chanda Kochhar, MD & CEO, ICICI Bank
The decision to hold policy rates was expected given the rate cut just a few weeks ago, and in line with the central bank’s approach of observing the inflation trends over a period of time before taking policy action. Several regulatory measures announced in the policy are very welcome. These include measures to enhance the ability of bankers to protect their interests as well as maximise the value of assets created in the economy. The introduction of differential rate structures for non-callable deposits will help banks in asset-liability management. The liberalisation of outward remittance limits reflects the substantial reduction in our vulnerability to external events.
Arundhati Bhattacharya, Chairman, State Bank of India
“RBI policy was in line with market expectations of a status-quo. The SLR cut is expected to provide growth supportive liquidity of about Rs. 45,000 crore. The flexibility regarding the DCCO will enthuse companies with strong balance sheets to consider taking over stuck Projects. With inflationary expectations at a 21 quarter low and coupled with a benign global environment, we are in the early phases of a prolonged rate easing cycle.
RBI SLR Cut: Market Reaction
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Indranil Pan, Chief Economist, Kotak Mahindra Bank Limited:
We were not expecting the RBI to cut rates in this policy – on a belief that fiscal remains an important component for the monetary policy, even as comfort on the CPI trajectory remains. While a significant segment of the financial markets were rejoicing the extra liquidity that will likely be pumped into the system through ECB’s QE, the RBI seems to be still worried on the course correction on interest rates by the US Fed. Indeed, RBI indicated that heightened volatility in the global financial markets and also “through the exchange rate channel” is still a risk to inflation assessment. It was also clear from the post policy press conference that at all points RBI would maintain a cautious watch on what is happening in the global arena. With this as the background, the RBI has now allowed FPIs to put money only in the 3year + maturity bucket for corporate bonds and has also not enhanced the limits of G-Sec investment, except for allowing the FPIs to re-invest the coupon earned. This could open up space amounting to USD2.5-2.75 bn in the G-secs for the FPIs. On the future course of policy, we think that the option of further cuts will be evaluated only after the Union Budget and thus the timing of the next cut is between March (post Budget and outside policy date) and April 7 (next policy date).
Dipen Shah, Head- Private Client Group Research, Kotak Securities:
“The RBI action of maintaining rates was in line with expectations. The reduction in SLR may not have any immediate impact as banks already have excess liquidity.
RBI has shifted its focus from CPI inflation to fiscal actions, as it wants Government to focus on improving long term sustainability of low inflation, beyond dis-inflation caused by global commodity price corrections. Going ahead, we believe that, RBI will closely watch the budget and the fiscal announcements before deciding on future rate cuts.
Also, government is expected to change the base year for CPI inflation from current 2010 to 2012 from January onwards which could change the trajectory of CPI inflation a bit.
We suspect that this is a temporary pause and further rate cuts are likely in April. Although, we maintain that the space of further rate cuts are limited (50-75 bps over the course of FY16).
Kunal Shah, Fund Manager – Debt, Kotak Mahindra Old Mutual Life Insurance Limited
RBI has maintained status quo as per our view, clearly re-iterating that it will watch fiscal developments in budget and further inflation prints to decide on further easing of rates. SLR cut of 50bp was unexpected however its impact should not be significant given current credit demand cycle.
RBI would closely watch detailed revision in GDP data and CPI index. However with current projections of CPI inflation at 6% by 2016 continues to provide room for more easing given government delivers on fiscal front. RBI has been re-iterating that it will like real risk free rate at around 1.5%-2%. If inflation averages around 5%-5.50% in next fiscal year it will provide RBI room to cut rates by 0.75%-1.00% from current level of policy rates. Once again onus is now on Government to deliver on fiscal and supply side measures to deserve lower cost of capital. Bond yields should stabilize in narrow range after sharp drop. Inflation prints, global commodity prices and fiscal deficit prints should provide more cues in near future”.
Ganti N Murthy, Head – Fixed Income, IDBI Asset Management Co Ltd.
“As expected the RBI had maintained status quo in its meeting today . This was expected as the RBI had cut the repo rate only 15 days ago and since monetary policy changes take effect with a time lag, we did not expect any change in the key rates today. Further rate cuts would be data dependent and the next major cues should be taken from the Budget ( to be presented on the 28th of this month). We still maintain our view that inflation would be soft and we can expect further rate cuts during the calendar year of about 50 bps”.
Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mutual Fund
“RBI chose to keep the repo and the CRR unchanged, while it slashed the SLR by 50 bps. The action is indicative that the central banker is communicating its softening stance but would defer its rate action to post fiscal deficit numbers for FY16. RBI has as much stated it explicitly that fiscal consolidation and disinflationary pressure would be the key factor for determining the policy. In this backdrop, the Union budget and the borrowing figures become increasingly important from the market viewpoint to determine the course and the pace of the rate cuts in the time ahead. Duration funds seem better placed to tap this evolving environment.”
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI:
“The RBI had made clear in its previous policy statement that the next move will be dependent on the quality of fiscal consolidation. So the next cut will be only post the budget.
“I expect front loading of rate cuts to continue with another 50 basis points of cuts to be delivered before June 2015. A cut after the budget will be a boost to the overall sentiment if the budget announces some good investment plans.
“Post June, there will again be a pause on rates as there will be a clearer picture on the growth front by then. Hence, the RBI will rather try to focus on bringing inflation down to its 6 percent target.”
U.R. BHAT, MANAGING DIRECTOR AT DALTON CAPITAL, MUMBAI:
“The Reserve Bank of India has taken a stance for the budget. If the government is pursuing the fiscal consolidation path properly, then we can expect more easing soon.
“The SLR cut is insignificant as most banks hold heavy quantity in SLR as there are no significant lending opportunities. The RBI can ease 25 basis points once in every 3-4 months and a total of 100 basis points over the next fiscal year.”
DEVENDRA KUMAR PANT, CHIEF ECONOMIST AND SENIOR DIRECTOR AT INDIA RATINGS & RESEARCH:
“On the whole, the data is as per expectations. The cut in SLR by 50 basis points is not a very effective tool, but it’s good sentiment-wise as this would give assurance that the RBI is looking at liquidity.
“We expect 75 basis points cut in 2015/16. The first cut will more likely be after the budget, depending on how the fiscal consolidation path is laid out in the budget. The RBI will look into the feasibility of expenditure, calculation of oil and other subsidies.”
RADHIKA RAO, ECONOMIST, DBS, SINGAPORE:
“The tone of the accompanying statements was dovish, but cautious, highlighting two aspects a) fiscal slippage … b) an acknowledgement of the shift in global dynamics and undercurrents of a renewed push to depreciate currencies.
“This also reflects the RBI’s disdain with quantitative easing programs (as ECB joined the bandwagon, just as the U.S. Fed bowed out) and the associated risks to financial stability and asset markets.
“We maintain our call for another 50 basis points cuts by the June quarter after the FY16 budget contents are sieved through.”
SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK CAPITAL, MUMBAI:
“Today’s move seems more practical and the future course of action would largely depend on how effectively the government is maintaining its fiscal deficit in the upcoming union budget.
“Though international crude prices have shown some volatility in recent days, we believe oil prices to remain favourable at least till the first half of coming fiscal year.
“Assuming the current economic scenario and a clarity over the fiscal consolidation plan, we believe the RBI to come up with one more 25 basis points rate cut any time between mid-March and next policy date of April 7, 2015.”
DEVEN CHOKSEY, MANAGING DIRECTOR, KR CHOKSEY SECURITIES:
“I think the policy was more in line with the expectations. The 50 basis points cut in SLR is symbolic, but I think it is a positive move. This will provide additional liquidity for banks and will help banks to increase lending.
“We do expect the RBI will reduce the rates sooner, which will fuel growth in core sectors like infrastructure and manufacturing.”
SANDEEP NANDA, CHIEF INVESTMENT OFFICER, BHARTI AXA LIFE INSURANCE, MUMBAI:
“By and large the policy has been on expected lines. Nobody was expecting a rate cut. The RBI wants to take a look at the government’s numbers in the budget before thinking further. If current trends in commodity prices and India’s fiscal deficit prevail, then one can expect another round of easing after the federal budget.”
R. SIVAKUMAR, HEAD OF FIXED INCOME, AXIS ASSET MANAGEMENT:
“The rate action is more or less expected. We have also been expecting there will be some movement on SLR over a period of time.
“The interesting bit will be rule changes on Foreign Institutional Investors, which would have some impact on the corporate bond market. We continue to expect the RBI to cut another 50-75 basis points in this calendar year, and the current statement is fairly in line with its recent guidance.”
*10-year benchmark bond yield gained 3 basis points (bps) to 7.68 percent after RBI policy review
*Rupee trimmed gains to 61.76 per dollar, was at 61.67 before
NSE index turned negative, down 0.1 percent, had been up 0.1 percent earlier
One-year overnight indexed swap rate gained 9 bps to 7.55 percent after RBI holds rates steady – traders
A Reuters poll of economists last week expected the central bank, having cut interest rates on Jan. 15, to keep its benchmark repo rate unchanged at 7.75 percent at Tuesday’s policy review.
Retail price inflation tumbled to 5 percent in December, auguring well for the RBI’s chances of achieving its target of 6 percent by January 2016.
Analysts expect the central bank to cut rates by 100 basis points over the next 1-1/2 years.
The forecasters said future moves could depend on the government’s annual budget in late February.
They expect India’s finance minister Arun Jaitley to set a deficit target of 3.8 percent of gross domestic product for fiscal 2015/16 during the budget, lower than this year’s 4.1 percent target.