October 4, 2016 / 9:31 AM / 10 months ago

Expert Views: India's monetary policy panel pares rates as new governor takes stage

8 Min Read

The Reserve Bank of India (RBI) Governor Urjit Patel speaks during a news conference after the bi-monthly monetary policy review in Mumbai, India, October 4, 2016.Danish Siddiqui

(Reuters) - India's newly appointed monetary policy committee delivered a surprise 25-basis-point cut in the repo rate to 6.25 percent on Tuesday, as Reserve Bank of India Governor Urjit Patel presided over his first policy review since his appointment last month.

The repo policy rate INREPO=ECI is now at its lowest since November 2010.



"Markets were always likely to look at today's RBI decision as signaling what the priorities of the new governor and newly-established MPC will be. The answer – in the form of a surprise rate cut – seems to be supporting growth even at the risk of missing targets for inflation. That's a break from the more hawkish stance of the previous governor, Mr Rajan."

"Looking ahead however, we continue to think that the scope for loosening is limited. For a start, The RBI confirmed today that its existing inflation targets of 5 percent for March 2017 and 4±2 percent for March 2018 will remain in place under the new leadership. This is important, given that the central bank faces a tough challenge in meeting these targets."

"Today's decision implies a slight dovish bias among the new MPC, which contrasts with the more hawkish approach of the previous governor (who had sole decision-making power over policy rates). This suggests that we could see further modest, loosening over the coming months. But the scope for aggressive rate cuts is limited."

Rana Kapoor, Ceo, Yes Bank, Mumbai:

"The maiden policy decision taken by ... MPC is completely justified by the ongoing disinflation in the economy."

"Today's rate cut will boost sentiment and contribute towards reinvigorating growth impulses in the infrastructure, construction and manufacturing sectors. Backed by a healthy set of domestic macros and sustained global deflation, I expect 75 basis points further easing in the coming months."


"The normal monsoon and record agricultural sowing have softened food prices, indicating that inflation will be on the desired trajectory."

"Monetary policy stance remains accommodative. It is likely to be data-driven on inflation, with caution on impact of 7th pay commission. We shall continue to watch out for economic data and accordingly address transmission of interest rates."

Murthy Nagarajan, Head-Fixed Income, Quantum Amc, Mumbai

"The RBI cut the repo rate as expected and more importantly all six members of the newly formed MPC voted towards the 25 bps cut. This shows major consensus on the decision which should be well taken by the markets. But there is little else in the document that indicates on the future trajectory of inflation and rates and it is thus difficult to guess RBI's next move. We expect it to continue with proactive liquidity management which should enable further cut in lending rates and lower EMIs in the near future."


"The reduction in repo rate has been driven, expectedly, by continuing improvement in food inflation given strong sowing and measures to improve supply. We are hopeful that ample liquidity will enable continued transmission of this reduction, which will help further vitalize industry. The Reserve Bank is rightfully mindful of potential inflationary risks from the House Rent Allowance revisions and the minimum wage increase. We believe this will inform the medium term rate decisions, given the ambitious medium term inflation target of 4 percent."


"A 6-0 verdict for a 25 bps rate cut should be very well taken by the markets, and Dr. Patel by starting with a rate cut in his first policy seems to have focused on data. But the absence of a clear outlook, stance and 1 year out inflation trajectory would keep the markets guessing on the next move."

Abheek Barua, Chief Economist, Hdfc Bank, New Delhi

"We had anticipated this, and given the current trajectory of inflation, there was a window of opportunity to cut rates. The sooner they did it the better. I am happy that they did it. In fact, unless the pay commission payouts and HRA allowances, lead to a pick up in inflation, I think there's room for another rate cut between now and the end of the year."


"Today's monetary policy action of a 25 basis point rate cut has already been priced in the market."

"Going by the tone of the policy we believe the liquidity driven growth assistance would play a key role in the coming months in addressing the growth scenario rather than a rate push impetus up till December 2016."


"While the RBI has cut the repo rate by 25 basis points, the policy statement remains less dovish in its guidance. It still sees upside risk to inflation target that has to be achieved by March end. While today's rate cut would accentuate the bond rally, I don't see much impact on the bank lending rates."

Radhika Rao, Economist, Dbs, Singapore

"Today's cut was along our expectations, with an unanimous vote by policy members. The accompanying rhetoric was relatively neutral rather than dovish, reinforcing the inflation target for Mar 17 at 5 percent, but with modest upside risks."

"Today's cut we reckon was a front loaded move given pipeline cost-push pressures into next year and global uncertainties over the next six months. Liquidity stance will nonetheless stay supportive to help markets deal with upcoming FCNR maturities and ensure policy transmission remains on track."

P. Phani Sekhar, Fund Manager, Karvy Capital, Mumbai

"We were expecting RBI to keep rates on hold as against a cut. But we believe a rate cut is not going to make a significant difference. Investors are watching for global action, whether RBI cuts or raises (interest rates) is of very little importance from a medium-term perspective."

"This is the first policy meeting of the new governor, we would not read too much into it."

"This policy, while important from a domestic point, serves limited purpose from a larger investor point of view. It is the global action that needs to be closely monitored."

Shubhada Rao, Chief Economist, Yes Bank, Mumbai

"This was along expected lines. That dominant pressure on headline inflation, mainly food, has begun to ease rapidly, which paved way for the 25 bps rate cut today."

"We believe that inflation is likely to surprise on the downside by about 20-30 basis points by end March, compared to the 5 pct stated by the RBI. As such, this could provide additional room for 25 bps rate cut in the current fiscal year."

"In our assessment, the monthly data on inflation print on account of food are likely to take the headline inflation at or below 4 percent, which could therefore allow the 20-30 basis points downside by end March."

Qi Gao, Fx Strategist, Scotiabank, Singapore

"The time is right for a cut delivered today given market uncertainty in the months ahead. It is not the end to the RBI's easing cycle. Further action will depend on the nation's CPI inflation and external factors such as the result of the U.S. presidential election. It is aimed to shoring up the nation's economic growth, drawing more portfolio flows and FDIs."

"My base scenario is no more cut this year. However, if Donald Trump wins, we may see one more rate cut in December."

Reporting by India newsroom; Editing by Euan Rocha

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