In the first interest rate cut in 18 months, the RBI on Thursday shed its hawkish stance to reduce policy rates in the maiden policy meeting under new governor Shaktikanta Das, a move that may make home and other loans cheaper.
Coming just months ahead of the general elections, the move will help boost lending and support the government's efforts to boost a slowing economy after it last week unveiled an expansionary budget which included a Rs 75,000 crore cash dole to small farmers and income tax rebate to the middle class.
The RBI's six-member monetary policy committee (MPC) cut the repo rate by 25 basis points to 6.25 percent as inflation continues to remain benign. While four out of the six members, including Das, voted for a reduction in interest rate, all the six members unanimously favoured switch in stance to 'neutral' from 'calibrated tightening' adopted in October.
One basis point is a hundredth of a percentage point.
Emboldened by a slowdown in inflation which fell to 18-month low of 2.19 percent in December and is expected to be in the range of 3.2-3.4 percent in April-September to 3.2-3.4 percent - lower than previous RBI prediction of 3.8-4.2 percent range, Das-led MPC weighed more concern about economic growth risks, paving the way for more rate cuts.
CNBC-TV18 caught up with Sajjid Chinoy, chief India economist of JPMorgan; Manish Wadhawan, head of fixed income, global markets at HSBC India; VS Rangan, executive director of HDFC and Dinesh Kumar Khara, managing director of State Bank of India, to decode the policy.
Chinoy said, "We are not particularly surprised. Our view was that RBI would change their stance and cut rates today. I think what you got from the MPC today was the reinforcement of what we got in October. The outlook has changed quite dramatically in the last six months, oil prices have collapsed and food prices are exceptionally benign. What that does is the outlook for inflation does remain benign."
"The RBI, as you said, has slashed its forecast to their credit marking to market regularly nowadays by another 70 basis points (bps) and inflation is going to remain below four percent for the foreseeable future. So, I don't rule out some modest easing, maybe another rate cut in the next quarter. Our research shows that ultimately it is headline that converges to core. So we think as the year goes on, the space for any monetary easing will be foreclosed. Finally, I am not so worried about growth. If you look at the stickiness of this core inflation, it tells us at least that output gaps are virtually closing. So I am a little bit more sanguine in terms of growth prospects and where the output gap is," he added.
Wadhawan said, "This is definitely a positive surprise for the market as 90 percent of the people had expected a stance change, but a rate cut is an icing on the cake today. Bond yields have already reacted around 5-7 bps in the long end and short end has gone down by something like 10 bps. The maximum inflation during the current calendar year is not more than 4 percent, it's up to 3.9 percent. So, an expectation of a rate cut further in April is still there and that is what markets are pricing at the short end."