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Expert views on RBI's decision to hold repo rate

Source : REUTERS
Last Updated: Tue, Oct 30, 2012 08:16 hrs
Reserve Bank of India logo is pictured outside its head office in Mumbai

The RBI left interest rates unchanged on Tuesday but cut the cash reserve ratio for banks and indicated it may ease monetary policy further in the March quarter, although inflation remains a near-term concern.

While the decision to leave the policy repo rate unchanged at 8.00 percent was in line with forecasts in a recent Reuters poll, expectations for a rate cut had grown after India's finance minister on Monday outlined a plan to trim the country's hefty fiscal deficit.

"As inflation eases further, there will be an opportunity for monetary policy to act in conjunction with fiscal and other measures to mitigate the growth risks and take the economy to a sustained higher growth trajectory," RBI Governor Duvvuri Subbarao wrote in his quarterly policy review.

COMMENTARY

RADHIKA RAO, ECONOMIST, FORECAST PTE, SINGAPORE

"RBI stood by its tough anti-inflation rhetoric by opting not to lower the key policy rate though preferred to trim the CRR as a step to lower funding costs and possible compromise. A rate cut in the face of jump in September WPI, sharp upward revision to historical numbers and recent rebound in the proxy core inflation measure, might have put the bank's inflation-fighting credibility at risk.

"Notably there appears to be some sort of policy guidance, as RBI expects inflation to ease in Q4 2013, priming the markets to lower expectations of an imminent rate cut. We maintain our call for 50 bps more cuts by end-FY13."

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI

"The policy is in line with our revised outlook post yesterday's fiscal consolidation plan. While current inflation is worrisome, going forward, it could provide some comfort. The stance of monetary policy is shifting towards supporting growth and maintaining comfortable liquidity to provide for the credit needs of the economy.

"And, as the government measures continue to unfold, we believe the RBI will continue to support growth with a rate cut. We're still expecting 50 bp rate cut during Jan-March, with inflation likely to peak in December."

KILOL PANDYA, HEAD OF FIXED INCOME, DAIWA MUTUAL FUND, MUMBAI

"I was expecting a 50 basis points cut in the CRR. The policy is in line with what the RBI has been saying. While it has raised the inflation projection and cut growth estimates, it has held out hope for a rate cut in the next calendar year. I expect the 10-year yield to hold in the 8-8.25 percent range."

JAGANNADHAM THUNUGUNTLA, STRATEGIST, SMC GLOBAL SECURITIES, NEW DELHI

"For the central bank, inflation is the main anchoring point and that has been the case all along. I don't think they will do much in the next couple of quarters as inflation is not going to come down any time soon.

"Now they are coming closer to the reality in terms of the GDP growth."

DARIUSZ KOWALCZYK, SENIOR ECONOMIST & STRATEGIST, CREDIT AGRICOLE CIB, HONG KONG

"Such outcome is in line with consensus, but there was a strong minority expecting a rate cut, so its lack should move markets: hit the INR (growth will take longer to rebound with high rates) and trigger paying flows on the INR OIS curve (it could steepen as gains in long end should be larger given that short end should be somewhat anchored via improvement of liquidity after CRR cut)."

A. PRASANNA, ECONOMIST, ICICI SECURITIES, PRIMARY DEALERSHIP LTD, MUMBAI

"Market was positioned for a rate cut, but a cut in CRR delays the beginning of open market operations (OMOs). There's a positive that RBI has said there's a likelihood of easing in the Jan-March quarter. Looks like RBI wants inflation to peak out before cutting rates so we shouldn't expect anything in December. We expect a 50 basis points cut during Jan-March."

DEVEN CHOKSEY, MD & CEO, K R CHOKSEY, MUMBAI

"If a CRR cut is not backed by a rate cut it doesn't make sense and this is unlikely to be reviewed before December. By sending more liquidity into the system the RBI is trying to ask banks to take the pressure. The excess liquidity will go towards projects, banks will be pressurised to lend but buyers might not feel confident about spending after borrowing at high rates. You have to allow expenditure to take place in the system so there is infrastructure development which will kick-start the economy."

BACKGROUND

- Prime Minister Manmohan Singh gave his cabinet an overdue facelift on Sunday, bringing in younger ministers in a bid to breathe new life into his aged, scandal-tainted government ahead of state and federal elections.

- India's fiscal deficit needed to be brought under control, a deputy governor of the Reserve Bank of India said on October 16, days after the finance minister called on the central bank to take "calibrated risks" to support the struggling economy.

- The government will move to cut its fiscal deficit to 3 percent of GDP by March 2017, the finance minister said on Monday, as the government tackles its ballooning expenditure to prevent the country's credit rating being downgraded to junk.

- A series of measures taken by Finance Minister P. Chidambaram will not fix the sluggish economy in the near term, and the window of opportunity for implementing game-changing reforms such as slashing government spending on fuel, food and fertiliser subsidies will narrow as campaigning for a 2014 election gets under way.

- India is shaking up the way it gets billions of welfare dollars to the poor with a plan that could one day reshape the economy and tackle graft keeping millions in poverty, but in one small town a pilot of the new system is proving unpopular.

- Rising fuel prices boosted Indian inflation in September to 7.8 percent, its highest level since November, undermining the government's case for a central bank interest rate cut this month to boost the sluggish economy.

- Annual exports fell for the fifth consecutive month and imports rose in September, pushing the trade deficit to its widest in 11 months as Asia's third largest economy struggles to balance its finances.

- India faces a one-in-three chance of a credit rating downgrade over the next 24 months, Standard & Poor's has said, although a series of reform steps launched in September had slightly improved the country's prospects.



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