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Economy

RBI Monetary Policy: What experts say about interest rate decision

Updated : October 04, 2019 01:38 PM IST

The Reserve Bank of India has cut the benchmark lending rate for the fifth time this year in order to revive the ailing economy. The RBI's Monetary Policy Committee (MPC) in its fourth bi-monthly meeting reduced the repo rate by 25 basis points to 5.15 percent. The central bank has also lowered the growth forecast for the fiscal year 2019-2020. Shaktikanta Das said the RBI will maintain its current "accommodative" policy stance "as long as it is necessary" to revive growth.

Here is what experts said following the RBI monetary policy decision.

SS Mallikarjuna Rao, MD and CEO of Punjab National Bank:

As per the expectation of the market, 25 basis points (bps) rate cut has happened from the Reserve Bank of India (RBI) and it is a good sign to create the vertical impact in the economy. With respect to the banking space, in terms of the interest rates are concerned, we are already aware that repo rate linkage advances and retail segment and micro and small segment, besides an amount of agricultural segment has already been taken care by the bank and PNB has also done that effective from October 1.

We will look into this rate cut in our ALCO committee to decide upon with respect to the marginal cost of funds based lending rate (MCLR) but because repo rate linked advances are there in the retail segment, automatically rate cut will happen to them.

Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank

We have to put this in context of the liquidity framework they have come up with but it hasn’t been finalized yet but somewhere we need to keep in mind transmission is important. But now this is a function of overall how the balance of payment would be and therefore what would be the required amount of OMOs. They have already in the framework that they would prefer a marginal deficit for a smoother transmission, so we have to keep all of that in perspective.

Ananth Narayan, Professor, SPJIMR

It’s pretty much as per expectations; 25 bps largely, I suppose, on account of questions around fiscal deficit going forward, but Governor Das has compensated for that by ensuring that the language is extremely dovish and the language seems to suggest there are more rate cuts coming through.

Kaushik Das, Chief Economist, Deutsche Bank

Bond markets will cling on these statements desperately because they would want to have open market operations (OMOs) in the second half because there would be supplies coming in the market and demand for bonds is dependent on how much banks are buying. So if the Reserve Bank of India (RBI) does OMO, it will be great. However, looking at the liquidity framework, what it seems is that, RBI will keep liquidity surplus and it will remain surplus for a long time but I am not sure whether RBI will want to rely just on OMOs to infuse that liquidity.

You know that they have talked about introducing a new instrument like long-term repo auction, so they might use those other instruments to infuse liquidity and not rely completely on OMOs because they have also said that excessive OMOs can distraught the yield curve, so you have to keep that in mind.

Mahendra Jajoo- Head-Fixed Income, Mirae Asset Global Investments

MPC cut key policy rates by 25 bps in line with market expectations. RBI largely retained inflation projections for next year and revised downward growth projections. In view of that, further rates cuts may be expected in forthcoming policy reviews. While money market rates eased in response, bond yields inched up slightly as traders remain apprehensive of larger than currently scheduled borrowings by the government.

The market will now look forward to any possible OMO purchase operations to get comfort on the absorption of additional supplies if any. We expect overall bond yields to remain range-bound with easing bias.

Abheek Barua, Chief Economist, HDFC Bank

I think there has to be a lot of reading between the lines, both in the liquidity stance and the liquidity framework, initial paper as well as the policy and the press conference as well as the view on rates.”

“I do not think anything is sacrosanct or driven by rules. There is a lot of discussions involved. My sense is that liquidity will continue to be considerably surplus probably more than 0.5 percent of net demand and time liabilities (NDTL) for a while to come till we see rates dropping from on actual lending and there is scope for another 25-40 bps of cutting going forward.

Aditya Narain, Head of Research, Institutional Equities, Edelweiss Securities

To some extent market would be neutral to this 25 bps cut but what would have been there at back of peoples’ mind was whether the RBI would step-in more aggressively to address this issue either by means of a more aggressive rate cut or by actually stepping-in and doing something more aggressively from a countercyclical perspective. They have done a little bit in terms of increasing limits for MFI lending but I think there would have been implicit kind of hope that they effectively did a little bit more.

From market perspective, I would tend to believe that the second thing that has got missed out is the fact that there is a certain amount of risk perception that is building upon the liability side, on deposit side given that you had a couple of scares. While the governor did address the issue in a press conference, I would have thought something more emphatic either in terms of measures or in terms of statements within the policy, I think that would have been more market supportive.

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