In an unprecedented move, the Reserve Bank of India's (RBI) monetary policy committee (MPC) has cut repo rate by 35 basis points. A CNBC-TV18 poll showed the market was expecting a 25 bps cut but the MPC sprung a surprise with an even dovish reduction.
This was the fourth straight cut in the key policy rate since governor Shaktikanta Das took charge of the RBI. With this cut, the repo rate is at its lowest level in the last nine years.
All the six members of the MPC voted unanimously to maintain the 'accommodative' stance. However, only four members, including the governor and the two RBI representatives, voted for a 35 basis point cut. Two external members Pami Dua and Chetan Ghate voted for a 25 basis point cut.
The governor made it clear that inflation outlook remains benign and growth deserves the "highest priority."
CNBC-TV18 spoke to Pranjul Bhandari, chief India economist at HSBC, Rajiv Anand ED at Axis Bank, Lakshmi Iyer CIO-debt and head-products at Kotak Mahindra AMC and Arijit Basu MD at State Bank of India to decode the monetary policy.
On RBI's gross domestic product (GDP) growth forecast of 6.9 percent Bhandari said: "I think 6.9 percent is a very high number. Our own growth forecast for FY20 is 6.4 percent. I think with some downside risks to that, we think there is 50 basis points more in rate cuts out there which is necessary to help the cyclical element of the slowdown."
Anand said: "As far as the bond markets are concerned, the RBI governor mentioned that 50 basis points was too much, so the markets are a bit spooked at this point in time that does that mean that we are not going to get any more rate cuts as we go forward?
"So that was just a bit of an uncertainty that got built. However, fundamentally we are seeing synchronous rate cuts across the globe and we are really part of that rate cycle. I do believe that we will see 25 basis points if not 50 basis points more going forward depending upon how much of a slowdown we see as we go forward. So to that extent we will see rate cuts as we go forward."
Iyer said: "Between now and March end if the base case assumption is for another 25 basis odd rate cut, which will take the repo rate to may be now sub 5.25 percent, that is what we had as a base case, so anywhere between 5 to 5.25 percent there is enough and more leg room for the absolute cost of capital for corporates to ease by another 40 to 50 basis points."
Basu said: "The intent of the RBI for quicker monetary transmission was that it should be linked to an external benchmark. After examining it, we have linked it. Just to give a number, all the cash credit and overdraft, which is the working capital loans from the SBI, from September 1, after today's rate cut, the best rate would be at 7.65 percent which is way lower.
"So there has virtually been transmission in the SBI along that. If you take home loans also, apart from the benefit that the home loan borrowers will get because of the marginal cost of funds based lending rate (MCLR) cut, because we now have a repo-linked home loan rate, it gets passed on.
"However, yes, for the system as a whole, I do take that the RBI is keen on ensuring that all banks do follow this. In fact, the SBI was also mentioned by the RBI governor when he gave his address and we hope that the rate cuts get transmitted as quickly as possible."