RBI monetary policy review: Raghuram Rajan cuts repo rate by 50 bps; check out full speech

By: | Updated: September 29, 2015 12:35 PM

RBI monetary policy review: The Reserve Bank of India has cut its key repo rate by a bigger-than-expected 50 bps to 6.75 percent on Tuesday, with inflation running at record lows and the economy in danger of slowing down. Repo rate was left unchanged at 4%.

RBI monetary policy review: The Reserve Bank of India has cut its key repo rate by a bigger-than-expected 50 bps to 6.75 percent on Tuesday, with inflation running at record lows and the economy in danger of slowing down. CRR was left unchanged at 4%. A Reuters poll last week showed only one out of 51 economists had expected a 50 basis points rate cut, while 45 had expected a 25 bps cut.

COMMENTARY
ATSI SHETH, ASSOCIATE MANAGING DIRECTOR, SOVEREIGN RISK GROUP, MOODY’S INVESTORS SERVICE, SINGAPORE
“The extent of the cut was higher than market consensus, suggesting that RBI sees underlying growth trends as still subdued enough to require more aggressive stimulus. It also suggests that inflation is not the key risk at this time, in the RBI’s view.”

Check out the entire story: Read Raghuram Rajan’s full speech in pdf

RUPA REGE NITSURE, CHIEF ECONOMIST, L&T FINANCE HOLDINGS, MUMBAI
“A higher than expected easing is certainly bond positive. How, it gets transmitted to the real sector via credit markets remains a concern given the huge pile of stressed assets in the banking system. The use of the term front loading clearly signals that there is going to be a long pause after today’s move.”

NAVNEET MUNOT, CHIEF INVESTMENT OFFICER, SBI FUNDS MANAGEMENT, MUMBAI
“A cut of this magnitude was warranted and this will have positive ramifications on growth and markets. We should test 7.50 percent on 10-year yield with potential to go even lower. The linkage of real rates to 1-year treasury bill opens up room for further rate cuts.”

ATSI SHETH, ASSOCIATE MANAGING DIRECTOR, SOVEREIGN RISK GROUP, MOODY’S INVESTORS SERVICE, SINGAPORE
“The extent of the cut was higher than market consensus, suggesting that RBI sees underlying growth trends as still subdued enough to require more aggressive stimulus. It also suggests that inflation is not the key risk at this time, in the RBI’s view.”

KUNAL SHAH, DEBT FUND MANAGER, KOTAK LIFE INSURANCE, MUMBAI
“It is a positive surprise but some growth worries have also been recognised by RBI. It is overall positive for growth and markets. This is the first time RBI has said that it wants to keep real rates benchmarked to 1-year treasury bill. The 10-year benchmark bond yield may fall to 7.50 percent. The absence of monsoon fears is also another positive on food inflation.”

BACKGROUND
* The Reserve Bank of India is expected cut its key repo rate to a four-year low on Tuesday to help support the domestic economy at a time when consumer inflation is at a record low, but may express caution about easing further as price risks still loom.
* The Reserve Bank of India is likely to cut interest rates for the fourth time this year at a policy review next week, as falling energy prices have cooled inflation and the economy has slowed, a Reuters poll showed.
* Indian growth slowed by more than expected in the quarter to June, a setback for Prime Minister Narendra Modi that will prompt more urgent calls from his aides for interest rate cuts.
* India’s inflation dived to a new low in August, helped by falling global commodity prices, bolstering prospects of an interest rate cut by the central bank later this month.
* Indian Finance Minister Arun Jaitley is stepping up pressure on the central bank to cut rates as the economy struggles and price rises slow, with some bureaucrats working behind the scenes to argue for an immediate cut of as much as 50 basis points.
* Though the Reserve Bank of India is expected to cut interest rates next week by a quarter percent to a four-year low, officials say concerns over prices make it likely to resist political pressure for significant easing in the coming months.
* A top adviser to Prime Minister Narendra Modi called on Thursday for cuts in interest rates to boost India’s sluggish economy, putting pressure on the country’s cautious central bank ahead of a policy review later this month.

RBI monetary policy review: Now, read the entire story
* India cbank cuts repo rate by 50 bps to 6.75 pct
* Cites low inflation, weak economy, Fed rate hike delay
* 10-year bond yield falls 9 bps
The Reserve Bank of India (RBI) cut its policy interest rate to a 4-1/2 year low of 6.75 percent on Tuesday, in a bigger-than-expected move that, with inflation running at record lows, could help an economy in danger of slowing down.

A Reuters poll last week showed only one out of 51 economists had expected a 50 basis points cut in the repo rate , while 45 had expected a 25 bps cut.

The RBI had previously cut interest rates three times this year, lowering it by 25 basis points each time.

The RBI justified the bigger reduction, saying consumer inflation was likely be running at 5.8 percent, below the 6 percent target for January, thanks partly to the government’s efforts to contain food prices.

At the same time the central bank cut its economic growth forecast to only 7.4 percent in the fiscal year ending in March 2016, lower than its previous 7.6 percent projection.

The RBI also drew comfort from U.S. Federal Reserve delaying the first hike in U.S. interest rates in nearly a decade, according to a statement written by Governor Raghuram Rajan. Once U.S. rates rise, analysts expect some emerging market currencies to come under pressure.

“Monetary policy action has to be accommodative to the extent possible, given its inflation goals, while recognizing that continuing policy implementation, structural reforms and corporate actions leading to higher productivity will be the primary impetus for sustainable growth” the RBI said.

The benchmark 10-year bond fell 9 basis points to 7.64 percent after the news. Share indexes edged higher.

An interest rate cut had been widely expected after India reported consumer inflation had fallen to a record low of 3.66 percent in August, and there have been calls from within  government and industry for the RBI to lower borrowing costs.

Still, it is unusual for the RBI to lower interest rates in September, as it has tended to be on the defensive against food price pressures during the monsoon season running from mid-June through September, after enduring several years of weak rains.

Since adopting the repo rate as its main policy tool in 2004, the central bank had never cut rates during this period.

This is also the biggest single monetary policy move taken by Rajan and it takes the repo to its lowest since March 2011. Since taking the helm of the central bank in September 2013, Rajan has raised the repo rate three times and lowered it three times, all by a magnitude of 25 bps.

Calls for lower rates first began to grow louder after the release of data showing the economy grew by a slower-than-expected annualised rate of 7 percent in the April-June quarter – faster than China, but well below the government’s target of 8 to 8.5 percent for the year ending in March.

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