The Reserve Bank of India has cut repo rate by 25 bps to 5.75 percent and changed policy stance to 'accommodative' from 'neutral'.
Here are comments from experts on the rate cut: Ananth Narayan, professor at SPJIMR: I hope that along with this positivity and hopefully a kick-start in animal spirit, we see real reforms coming through. We shouldn’t lose sight of that. This is not just interest rates and liquidity. It is also about managing the fisc, it’s about doing the reforms on NBFCs and getting the growth reform put through as well. However, for now, a great start and great to see this policy coming out the way it has. Kamal K Mahajan, general manager & head of treasury & global markets at Bank of Baroda: This policy is in fact confidence building for the market. As far as market rates are concerned, they always get transmitted, but in banking also, with accommodative stance, we expect certain other liquidity measures to come directly. That will surely help reduce the gaps, which are there in the growth of advances and deposits. Certainly we can see the transmission happening and that will be good for banking. Upasna Bhardwaj, senior economist at Kotak Mahindra Bank: Clearly, it is a fairly dovish policy and broadly in line with expectations because the growth on the inflation forecast were higher, they had to be revised down. Yes, we were talking about liquidity framework, there is some clarity on that. They have announced that. Along with that, 25 basis points (bps) of a rate cut, 6:0 is also a pretty pleasant surprise because markets were probably expecting 5:1 kind of a combination. Overall, the entire package is fairly dovish and it does assure you of the dynamic requirement, which is being met by the RBI and the MPC as and when the need be. Anuj Puri, Chairman, Anarock Property Consultants: Even though the Indian economy is perceived to be in the grips of a slowdown, the markets are quite bullish on Prime Minister Narendra Modi’s return to power with a thumping majority. This may eventually lead to mitigated risks in fiscal deficit; in all likelihood, it is sensing this that the RBI has made this rate cut.
As for the housing sector, this rate cut may only send out positive notional signals -- its real gain can be realised only if banks pass on the benefits to actual homebuyer borrowers.
The apex bank will need to ensure that this actually happens at the ground level since there has been little evidence of such transmissions in the recent past.
In the current scenario, bereft with rising NPAs and the ongoing NBFC crisis, things look quite bleak. The reason why most banks are not really able to pass on the benefits of RBI’s rate cuts is that their deposit rates are still very high. This ultimately makes reducing interest rates to borrowers unfeasible.
Nevertheless, this rate cut will have any really significant impact on the housing market if and when banks reduce their lending rates to homebuyers.
Garima Kapoor, Economist and Vice-president, Elara Capital: A shift in stance to 'accommodative' is welcome as it will pave the way for transmission to lending rates, which so far have been inadequate.
"We expect the MPC to cut rates by an additional 50 bps through the year while continuing to fine-tune liquidity support through a combination of OMO purchases, forex swap and CRR cut.
Parth Mehta, MD, Paradigm Realty, Mumbai: The rate cut of 25 bps was imperative to induce liquidity in the downward spiral economy on the back of all indicators showing slowdown.
The stance change from 'neutral' to 'accommodative' by the RBI indicates the cognisance about the current fragile business environment and we expect further rate cuts.
Rate cuts shall enable affordability in terms of home loans and thus lower equated monthly installment, GST and tax rebate for the middle class as per the interim budget. All these shall give some sales impetus to the real estate sector.
Narendar Pani, Dean, School of Social Sciences, National Institute of Advanced Studies, Bengaluru: While the RBI's effort is no doubt to boost investment, it is not clear how much of the reduction in repo rates will be passed on. The criminalisation of large defaults brings with it a discomfort among bankers to be associated with very large loans. Less successful commercial banks may also feel the need to keep their credit deposit ratios low, in case they suddenly need to write off large NPAs. They may not be too enthusiastic about lowering rates to increase credit.
Secondly, a large part of the crisis is one of demand rather than supply. Interest rate cuts are designed to increase the supply of funds for investment, and would not have a direct effect on demand. The route to boosting the economy may then lie more in the fiscal policy rather than the monetary policy. An excessive reliance on easing money supply, when production is constrained by demand, could be inflationary.
Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, Mumbai:
The change in stance to 'accommodative' was a bit of a surprise. Debt markets will take this as a significant positive move, though most of the rate cut cycle is probably over. The tone of the RBI policy was dovish and highlights the concerns on growth.
We maintain our call for another 25-bps rate cut in August factoring in the benign inflation trajectory and growing concerns on growth.
However, the transmission of rate cuts will be key and the RBI should aim to maintain liquidity, at least at neutral over the next few months.
Sakshi Gupta, Economist, HDFC Bank
If growth impulses continue to remain weak in Q1, below the RBI's target, and inflation impulses remain muted given normal monsoons, there is room for another rate cut of 25 bps in August.
On growth, high frequency indicators continue to signal lower activity in Q1. Further, an unfavourable base effect could mean that GDP growth numbers remain muted in H1 FY19-20. Some pick-up in activity is expected in H2. For the year, growth forecast is 7 percent.
The government is likely to stick to its fiscal deficit target announced in the interim budget of 3.4 percent of GDP. That said, higher growth will be necessary to achieve this target.
Anagha Deodhar, Economist, ICICI Securities, Mumbai:
The recently released GDP numbers show that growth is faltering. Given the challenging domestic and global environment, growth is likely to remain weak in H2FY20. Although supporting growth is not the MPC's primary mandate, in the current environment it has assumed greater significance.
Given the lower growth and inflation expectations, it was apt to change the stance to 'accommodative'. It indicates that more rate cuts are on the table – possibly in the next policy itself."
The government is likely to continue walking on the fiscal consolidation path. We do not expect large-scale sops in the budget as the government is walking on a tight rope when it comes to the fiscal situation. However, we could see increased focus on employment generation, labour-intensive industries and boosting investments.
Devendra Pant, Chief Economist, India Ratings, New Delhi: The 25-bps cut with 'accommodative' stance with 6-0 vote shows that with inflation below the RBI's target of 4 percent, growth concerns have come to the forefront. By changing its stance, the RBI has communicated to the market that the growth slowdown is real.
A working group on liquidity is a welcome step. With system liquidity in surplus mode in the past few days, lending rates should come down.
The forthcoming budget is the real test for the government. The government has to find money for social spending and undertake some hard reforms to improve tax collection and adhere to the fiscal consolidation trajectory.
Joseph Thomas, Head Research, Emkay Wealth Management, Mumbai: The RBI policy is exactly on the lines expected by most of the market participants. The repo rate cut of 25 bps and the change of stance from 'neutral' to 'accommodative' are key to supporting the sagging economic growth.
The projected growth has been lowered to 7 percent. The policy also has broad indications of more actions on the liquidity front from the RBI in the coming days. This also confirms the commitment of the central bank to better transmission of the rate-cut effects through liquidity.
Rupa Rege Nitsure, Chief Economist, L&T Financial Holdings, Mumbai:
Today's policy actions are perfect and give a clear signal that the RBI will continue with easy monetary conditions until it sees a definite improvement in growth-inflation mix.
Going by the macro undercurrents, the rate-cutting cycle will continue in the coming quarters as well. Recent GDP numbers were consistent with the slowdown predicted by high frequency leading indicators and the RBI has taken a serious note of it.
The government too will address growth concerns in its upcoming full budget in July and there are pleasant signs that both the government and the RBI will work in tandem to pull the economy out of the trap.
Transmission will happen meaningfully if the banking system witnesses surplus liquidity conditions for a sizeable period and if the RBI undertakes confidence boosting measures for the NBFC sector.
We expect the MPC to cut rates by an additional 50 bps through the year while continuing to fine-tune liquidity support through a combination of OMO purchases, forex swap and CRR cut.
Andrew Holland, CEO, Avendus Cap Alt Strategies: The markets always want everything, I wanted 50 basis points and a clear direction on steps they might take in the NBFC sector but what we got is what the market was panning in anyway which is 25 basis points.
Sometimes, we look beyond the wording, the wording is saying we will do whatever it takes in some respects, but let us see what it is that we have to deal with. If they came in and said we got a real problem, we need to do this, obviously we are worried about what we are missing. So maybe they are saying little bit more clearly than we are and they are ready to act if need be and maybe slowly but surely they will just let this play out, die down and take appropriate action as and when they need to. So I am less worried about what they have said I am more disappointed that they didn’t do 50 basis point to be honest.
Prashant Kumar, CFO and Deputy MD, SBI: With the liquidity turning into a positive territory, banks would be in a much better position to cut the deposit rates because there is a dramatic shift in the liquidity from May to June and now there is a lot of surplus liquidity so banks should be in a position to cut. Going forward, from State Bank of India (SBI) side we have already done for our cash credit and overdraft (CC/OD), almost 30 basis point cut has been done and marginal cost of funds-based lending rate has also come down by 10 basis points. Going forward I think transmission would happen quickly.
With inflation coming down, we would be able to reduce our interest rates on deposits and our advances growth would also pick up.
Abheek Barua, Chief Economist, HDFC Bank: How many more rates cuts really depends on the way food inflation evolves. If it is significantly sharper than what their projections are showing, then we could see one more rate cut, but otherwise I think two more rate cuts is certainly on the table. Going forward, one of the important things that needs to be mentioned here is that we might see a significant shift in the entire liquidity management paradigm and the situation of a liquidity deficit which was really compatible with keeping the overnight rates inline with the repo rate might just be jettison and we might have an accommodative stance in liquidity as well, which means that we will have periods of surplus liquidity. That is something that the markets and the banks should also look at very closely instead of just fixating on how many more rate cuts.
I think the good old system of ensuring periods of surplus liquidity and its quick transmission when growth demanded it might just come back.
R Sivakumar, Head-Fixed Income, Axis MF: Two takeaways; one is the rate cut and the more important thing is the accommodative stance which removes any risk of rate hikes. All of this means that yields should continue to soften. The other thing which I am taking away is in the statement on regulatory policies that RBI is willing to revisit this liquidity framework. I think it is important because the RBI has looked at liquidity from this overnight or really short term liquidity at the banking system perspective which works well from an interbank perspective, but that has not resulted in transmission to the rest of the economy. So, they may need to look at liquidity a bit more broadly and the recognition that the money markets play a central role in transmission and they may need to completely revisit how the money markets work. So, I think on the whole it is very positive from lowering the yields perspective. So we do expect bond yields to continue to soften after this policy. The yields have already softened something like 10 basis points-odd today and that should continue over the coming weeks.
On the NBFC sector, the RBI has been clearly telling that it will allow the market to take care of whatever is happening and if necessary they will intervene. So, we are not clear as to whether the RBI will take a step very soon to open a specific liquidity window for the NBFC sector or it will allow the market to take care of that. However, having said that, I think NBFCs also are coming out with specific liquidity enhancement measures. As we are seeing in the last few weeks, many of them are consolidating. They are going for aggressive asset pool sales and other things. So, I think we are seeing that transition phase from one stage where they had access to very liberal CP windows from the mutual funds to a self-correcting kind of a situation. I think we will watch the scenario, but it is quite reassuring that the RBI is waiting and watching and wherever necessary they will come in and if necessary they will come in strongly into it.
Mrutyunjay Mahapatra, MD & CEO, Syndicate Bank: The benchmark rates are already correcting downwards and the pressure that we had in terms of one-year rates going up is already moderating in the market. So, I think deposit rate cut is on the anvil.