Experts were hoping for 25 bps cut in key lending rate on the back of cooling inflation and status quo by US Fed, which has given room for the RBI to cut short-term lending (repo) rate in its policy review on Tuesday.
RBI Governor Raghuram Rajan surprised market analysts on Tuesday by reducing repo rate by 50 basis points to 6.75 per cent from 7.25 per cent earlier. Earlier, 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.
The RBI had kept its benchmark lending rate viz. the repo rate unchanged at 7.25 per cent in its August 4 monetary policy review.
This time majority of participants were hoping for 25 basis points cut in key lending rate on the back of cooling inflation and status quo by US Fed, which has given room for the RBI to cut short-term lending (repo) rate in its fourth bi-monthly monetary policy review on Tuesday.
Finance minister Arun Jaitley last week asserted that common sense says the interest rates should come down. Jaitley had said inflation is “very much under control” and the country is better prepared than most emerging economies to weather the global economic turbulence.
Here is how governor Raghuram Rajan surprised market analysts as most of them were predicting a 25 basis points rate cut in the fourth bi-monthly monetary policy review.
YES Securities: Nitasha Shankar, vice-president, research, YES Securities, said, “With inflation continuing to trend downwards there are expectations of a rate cut by the RBI in its upcoming policy meet. The expectations have been further strengthened by the US Fed maintaining status quo on interest rates. The markets appear to be pricing in a 25 basis points rate cut.”
Bank of America-Merrill Lynch (BoA-ML): The global financial institution expects RBI Governor Raghuram Rajan to cut rates by 25 basis points on 29 September. In a research note, BofA-ML said, “The RBI will likely talk hawkishly – citing monsoon and Fed risks – to signal that it will hold through December. We expect another rate cut by 25 basis points cut in February, with inflation meeting the RBI’s ‘under-6 per cent’ January 2016 target.
Nomura: The Japanese brokerage firm also expects a 25 basis points repo rate cut to 7 per cent. Even as monsoon rains have disappointed, aggregate food inflation has remained contained and CPI inflation is likely to undershoot the RBI’s near-term target due to lower oil prices. The US Fed did not deliver a surprise in September. Additionally, external demand has worsened in the last few months, which along with weaker monsoon rains suggests some downside risk to the growth outlook. With growth and inflation surprising on the downside, Nomura expects RBI to deliver a 25 basis points repo rate cut.
Kotak Institutional Equities: The brokerage house sees a high probability of a 25 basis points rate cut on September 29 based on its assessment of current global factors and domestic inflation conditions. “A window for another 25-50 basis points rate cut could open before March 2016 if CPI inflation for Jan-Mar 2016 is around 5 per cent. However, based on our current projected trajectory, the market may have to contend with a 25 basis points cut only,” Kotak said in a research note.
India Ratings: According to the rating agency, with real interest rates remaining high and a gradual growth trajectory, the regulator to cut the policy rates by 25 basis points this month. However, the agency said that uncertainty created by US Federal Reserve’s status quo may limit aggressive rate cuts and offer some protection against volatility.
Trade Smart Online: Vijay Singhania, founder, director of Trade Smart Online, a discount brokerage firm expects a cut in repo rate by at least 25 basis points, but the focus will be more accentuated on the stance which Rajan endorses. The hawkish commentary by RBI Governor will determine the broader trajectory. “We expect a rate cut accompanied with a cautious outlook, considering that adverse impact of poor monsoon has not been yet quantified. In addition, RBI will also have an eye on Fed, wherein the dust has not settled down on the possibility of hike in US interest rates,” he said.
Angel Broking: Vaibhav Agrawal, vice-president and head research, Angel Broking, said, “We expect the RBI to cut domestic interest rates by 25 basis points this month. Although we may not want to bet on the timing, we believe the RBI has enough headroom to cut interest rates by 50-75 basis points over the next 6-9 months. Led by our expectations, we have a positive view on the banking sector and select plays in the infrastructure sector.”
(With inputs from agencies)