The Reserve Bank of India (RBI) on Wednesday expectedly kept interest rates unchanged but held out a promise to cut them if the upside risks to the inflation do not materialise. It also coaxed banks to lend more in order to support the slowing economy.
With all the six member of the monetary policy committee (MPC) voting for a hold on rates, the RBI kept benchmark repurchase (repo) rate at 6.5 percent.
Having raised rates twice this year, the central bank retained its 'calibrated tightening' policy stance. "Even as inflation projections have been revised downwards significantly and some of the risks pointed out in the last resolution have been mitigated, especially of crude oil prices, several uncertainties still cloud the inflation outlook," it said in a statement.
CNBC-TV18 caught up with VS Rangan, executive director, HDFC Ltd, Jahangir Aziz, head - emerging markets economics, JPMorgan; A Prasanna, chief economist, I-Sec PD, Manish Wadhawan, managing director and head of fixed income, global markets, HSBC India; Prashant Kumar, deputy managing director, SBI; Arvind Virmani, former chief economic advisor and Surjit Bhalla member PMEAC, to understand the implications of today's policy.
Aziz said he is expecting a cut in February, "I am expecting that stance will change back to neutral in the February meeting. RBI has vociferously denied that it reacts to external conditions. But like any other central bank, RBI need to be very aware of what happens in February, how the global market re-prices Fed funds rate hikes and what happens to the 10-year US treasury. I think global financial conditions will matter. However, if those remain broadly stable, I think the first thing that RBI would do is to move the stance away from tightening to neutrality."
Prasanna said, "As far as the Open Market Operations (OMO) go, I would say this is the upper end of what most people would have expected in the market. One would have expected the RBI to slowdown in Q4 at least. The indication RBI is giving that central bank is not willing to tolerate any core liquidity deficit, that is system liquidity adjusted for government balances. So, by doing another Rs 40,000 per month, that is Rs 1.2 trillion in Q4, I think core liquidity will come closer to zero by end of March. I think that is what the RBI is aiming at and that is extremely positive for the bond market."
Wadhawan said, "First of all, today's policy did not change the stance. But the other factors regarding the OMOs and the statement by the governor regarding what can open up, markets have already started factoring in a cut maybe February or in April. If you look at the curves, it's already pricing in something now which is the next move rather than a hike which was anticipated till last policy."
"At present, we are not seeing any possibility of a rate cut, but if the inflation continues to be at the projections, which have been given by the RBI and if the credit growth slows down, then I think maybe going forward there is a possibility of a rate cut," Kumar said.
Arvind Virmani said the RBI Act has been changed that CRR cannot be reduced below 3 percent. If CRR value is supposed to be a liquidity measure for the banks, either that liquidity is not needed and you should not have a CRR, that is a structural decision which cannot be part of the monetary policy decision, Virmani said.
"We may agree or disagree with that CRR number but I do not think that is part of the monetary policy decision, that is as far as the CRR is concerned," Virmani added.
Surjit Bhalla said what is intriguing about is that it is a pause. The other thing is that we are still sticking to calibrated tightening and that the inflation forecast has been cut by 1 percent point and that implies a real rate of something like 3.5 percent, he said.
"Now can you please tell me as to what sense does it make for anybody to say that we are in a calibrated tightening phase and we are having the highest real policy rates in the world? So, I think there is a real disconnect there," Bhalla added.