The Reserve Bank of India on Thursday kept the key policy rate unchanged at 6.25% for the third time in a row and also maintained the policy stance at ‘neutral’, but narrowed the policy rate corridor to 25 basis points by raising the reverse repo rate and cutting the marginal standing facility rate. With the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.25%, the reverse repo rate under the LAF now stands at 6%, and the marginal standing facility (MSF) rate at 6.5%. The decision to keep the repo rate unchanged was in line with the expectations but raising the reverse repo rate was unexpected.
Here are some reactions on RBI’s Monetary Policy
Arundhati Bhattacharya, Chairman, State Bank of India
RBI policy to keep the Repo Rate on hold was on expected lines. RBI announced a number of measures like substitution of collateral under LAF. RBI announced a number of measures like allowing banks to invest in REITS. Measures taken by RBI will go a long way in improving the financial system.
Chanda Kochhar, MD and CEO, ICICI Bank
RBI’s clear articulation on liquidity management is welcome and would ensure stability in markets by enforcing the sanctity of the operating rate while addressing temporary liquidity imbalances. Money market rates would be anchored in a tighter band through the narrowing of the LAF corridor. RBI’s continued focus on inflation targeting will reinforce confidence in the Indian economy and continue to support capital inflows.
The focus on resolution of stressed assets will help in renewing confidence and boosting investment and aggregate demand going forward. Along with these, the policy also articulates other important developmental policies, such as expanding the investor base in REITs which would help to expand and deepen domestic financial markets.
Melwyn Rego, MD & CEO, Bank of India
Permitting banks to invest in REITs and InvITs are positives for real estate and infrastructure sector as well as banks. As an additional tool to manage liquidity, it has been proposed to consider the introduction of a Standing Deposit Facility. Minimum net owned fund requirement for ARCs, meanwhile, has been hiked from Rs. 2 Crore to Rs.100 Cr to encourage serious players into the business. The decision not to trigger CCCB for the time being is a positive for banks. CPI Inflation target for the first two half for 2018 has been hiked marginally which lends a slightly hawkish tone to the policy. GVA estimate has been hiked to 7.4% for FY 2018 from 6.7% for FY2017. Overall, the policy tone is neutral and sets the stage for a higher growth trajectory.
Radhika Rao, India Economist, DBS Bank
The RBI policy committee reaffirmed its neutral stance, whilst shifting inflation estimates for FY18 to the higher end of their February projections. They maintained that the move towards a 4.0% CPI target will be calibrated and gradual. At the same time, base projections point to above 4.0% inflation in FY18 and FY19, suggesting limited conviction that the 4.0% target can be met in the medium-term. However, risks of a hike are negligible for now. Official growth projections reflect their optimistic outlook limiting the need to take an accommodative policy stance.
The repo rate was left unchanged but the corridor narrowed to +/-25bps (reverse repo and MSF rates) around the policy target to better align other money market/call rates to the formal policy stance. As expected the CRR was left steady; either way a measured hike would have been insufficient to mop up the surplus. Hence the RBI will continue to dip into the existing toolkit of term reverse repo issuances, open market operations and MSS (FY18 ceiling is at INR 1trn) bond issuances are likely to continue.
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We expect RBI to go for a rate cut in the 3rd quarter provided the monsoon conditions remain normal in the economy. This said, in case CPI inches past 5% during this period, a rate hike cannot be ruled out. RBI definitely does not expect CPI inflation to go below 4% next year and the range of 4.5-5% will be the base on which the monsoon progress impact will hinge on. We believe GDP growth in FY18 would be in a similar range of 7.5% (RBI’s GVA is 7.4% and the difference with GDP is normally around 0.2).
Killol Pandya, Head- Fixed Income, Peerless Funds Management Co Ltd
RBI’s policy stance remained unchanged at “Neutral” and we hold that future calibration in the monetary policy may be substantially data dependent. We expect the benchmark 10-year G-Sec to trade broadly in the range of 6.70% to 6.90% for now. We may see some increase in corporate bond spreads in the coming weeks on the back of an expected increase in supply though robust FPI buying may temper the movements seen in domestic bonds.
Overall, the policy had a hawkish undertone for the bond markets and we may see some negative moves on the back of this policy. We re-state our view on the domestic bond markets as neutral and are of the opinion that investors with a medium to long term investment can invest in our bond markets in a calibrated manner.
Naresh Takkar, MD & Group CEO, ICRA Ltd
The status quo for the policy rate was along expected lines, with the stance having been changed to neutral in February 2017, and the Monetary Policy Committee’s (MPC’s) focus on bringing inflation to 4% in a durable manner. Given the inflation risks highlighted by the MPC, including the monsoon dynamics, increased allowances related to the pay commission, one-off impact of GST and global reflation risks, as well as the assessed trajectory of CPI inflation, the repo rate appears highly likely to be on hold during 2017.
The increase in the reverse repo rate and status quo on the cash reserve ratio are likely to offer relief to banks from the point of view of managing the costs associated with their excess liquidity.
Open market operations would help to durably absorb the liquidity surplus, a portion of which appears to be permanent and not frictional. The market will await clarity on both the magnitude of open market operations, which are constrained by the size of the RBI’s holdings of Government securities and operational details for the proposed non-collateralized standing deposit facility, which would greatly augment the Central Bank’s liquidity management toolkit.
We also await the detailed guidelines on various facets of banking which the RBI is likely to announce over the course of next two months with an objective to further strengthen the banking system.
R. Sivakumar, Head – Fixed Income, Axis Mutual Fund
“RBI left rates unchanged as the markets had expected. The markets were expecting some action from the RBI on the persistent excess liquidity which was keeping the overnight and short-term money market rates well below the policy repo rate. The RBI narrowed the corridor of rates under the LAF to 25 bps, effectively hiking the reverse repo rate by 25 bps.
Since the last policy in February we have had evidence of some softening of core inflation. Food inflation also remains contained. Going forward the Reserve Bank expects inflation to rise as food inflation normalizes. There remains the potential upside risk to inflation from the GST as previous experience in other countries suggest some inflationary pressure when similar tax changes have been done. Some upside risks remain from the residual impacts of the Pay Commission award.
As the RBI is on hold for the moment, we expect short-term bonds to outperform long bonds. Short bonds are less sensitive to the policy outlook as well as to global risks.”
Siddharth Purohit, Senior Equity Research Analyst – Banking, Angel Broking
The reverse repo hike is aimed at draining out excess liquidity which had piled up in the banking system post the demonetization saga. The raising of reverse repo should be constructed to be marginally positive for Banks as they can park the excess liquidity at their behest and earn the additional 0.25% interest from RBI.
RBI also permitted Banks to invest in REIT’s and InvIT’s and though further clarity is sought on the mechanism in which this shall be adopted, it can still be sentimentally positive for listed realty and infrastructure players.
Anand Natarajan, Head of Strategy & Business Execution, Fullerton India Credit Co Ltd
“The Reserve Bank of India’s decision to keep the repo rate unchanged was largely on expectations. Considering gradual re-monetisation and withdrawal of liquidity, narrowing the interest rate corridor adds more certainty to funding rates by anchoring the short term rates. The objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent, while supporting growth remains the key objective. While banks have reduced lending rates recently, maintaining a neutral stance gives the RBI flexibility to respond to incoming macroeconomic conditions.”
The policy rate corridor was narrowed from 50 basis points (bps) to 25 bps, bringing the reverse repo rate to 6% and the marginal standing facility (MSF) rate to 6.5%. This will now help to mop up liquidity and correct the recent steep fall in money market rates at the short end, by steering them closer to the repo rate.
The focus on inflation control can bring more predictability to policy making as well and engender a stable and low inflation environment. Both of these are beneficial to investment and consumption. Attempts to achieve the 4% target quickly would have created trade-off on the growth front. That’s because, a tight monetary policy may not sustainably bring down the sticky parts of inflation (food and those within core inflation), and may end up reducing demand in sectors with excess capacity that respond to interest rates.
The inflation forecast can be subject to upside risks from an occurrence of El Niño, an uptick in global commodity prices, the impact of an increase in house rent allowance under the Seventh Pay Commission, one-off effects of the implementation of the Goods & Services Tax, and any fiscal splurge on account of farm loan waivers.