December 5, 2019 / 7:00 AM / 3 months ago

Expert Views: RBI surprises by keeping rates unchanged, slashes growth forecast

BENGALURU (Reuters) - The Reserve Bank of India (RBI) kept its key lending rate on hold in a shock decision on Thursday, despite a worrying slowdown in the country that prompted the central bank to sharply reduce its economic growth forecast to 5% for the year through March.

Police stand guard as depositors (unseen) of the Punjab and Maharashtra Co-operative Bank (PMC) attend a protest over the Reserve Bank of India (RBI) curbs on the bank, outside a RBI office in Mumbai, October 1, 2019. REUTERS/Prashant Waydande/Files

The central bank acknowledged that it does have room to cut rates further, but said it was concerned about inflation in the near-term.

“The MPC recognises that there is monetary policy space for future action. However, given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture,” the committee said in a statement.

ANAGHA DEODHAR, ECONOMIST, ICICI SECURITIES, MUMBAI

“The MPC’s decision to pause is indeed surprising. This review marks a break from past trends as inflation concerns seem to have taken front-seat again.”

“Although they have stated that there is space for future action, I do not see rates going down by much in FY20 as inflation is expected to inch up sharply from here. The effectiveness of monetary policy in stimulating growth is limited in the current context.”

“The recent GDP data showed that government spending is the only strong leg of the economy currently. I think the government will let go of the deficit target this year and try to boost growth through increased spending. We could see more sector-specific relief and/or stimulus packages in the coming months.”

“Fiscal slippage is generally perceived negatively by the MPC. However, in the current context, I think the MPC will be more tolerant of fiscal slippage and continue with accommodative cycle.”

RUPA REGE NITSURE, GROUP CHIEF ECONOMIST, L&T FINANCIAL SERVICES, MUMBAI

“Cumulatively, monetary policymakers have done everything that was expected of them. Their revised projections of GDP and CPI inflation are realistic.”

“Going ahead, we need more actions from the government - Centre, states and local bodies that will make “spending” and “taxation” more efficient. This is a deep and protracted slowdown and India will witness a gradual recovery rather than a V-shaped recovery given the headwinds in both domestic and global economies.”

SAKSHI GUPTA, ASSISTANT VICE-PRESIDENT, HDFC BANK, GURUGRAM

“The RBI’s decision was a surprise, especially the fact that it was a unanimous decision. In the growth-inflation trade-off, the RBI has clearly leaned towards the latter.”

“We do not think that the recent inflation spikes are permanent and as food prices stabilise, headline inflation is likely to cool off by the beginning of next fiscal year. More importantly, core inflation momentum continues to remain weak.”

“Given the outlook on inflation and as RBI stance remains accommodative, we do not think this is the last cut in the current cycle but probably a brief pause. Growth momentum is likely to improve gradually, and therefore, it is likely to warrant further rate cuts.”

RAJESH CHERUVU, CHIEF INVESTMENT OFFICER, VALIDUS WEALTH, MUMBAI

“The MPC unanimously and shockingly left rates unchanged, but maintained accommodative stance against consensus market expectations of 25 bps cut. Given the widening fiscal deficit concerns, G-Sec supply pressure and wider-than-average spreads, we prefer good-quality corporate bonds over G-Secs. Any truce on the trade war and growth positives will benefit short vs long duration, which is our preferred strategy.”

JIMEET MODI, CEO, SAMCO SECURITIES, MUMBAI

“The RBI has finally thrown the ball back in government’s court to revive the economic engine, which has further deteriorated since the last meet. Transmission of interest rates have not happened yet, which could be one of the reasons the RBI waited to cut rates and nudged the government and banks to take efforts from their end. Additionally, slightly higher inflationary tendencies might have also led to the pause in rate cut.”

“However, this is a negative for the markets as a rate cut was required to boost risk taking appetite in the economy.”

DARREN AWE, ASIA ECONOMIST, CAPITAL ECONOMICS, SINGAPORE

“Tentatively, we are pencilling in a 25 bps cut in February. Beyond that, the picture is less clear. A strong recovery in growth in the near term seems unlikely, but there are at least glimmers of stabilisation in the recent data. Although industry continues to struggle, gauges of services activity, consumption and credit growth have all improved a little. And the effect of past monetary and fiscal stimulus should be felt soon. Our base case for now is that the easing cycle will come to an end in February.”

KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU

“Surprising us and the market, the RBI decided to keep the policy rate unchanged at 5.15%.”

“It seems that the RBI was more influenced by the optic of food price driven higher headline inflation even as they revised down their FY20 growth expectation to 5% yoy (close to our expectation of 5.1%) from their earlier expectation of 6.1%.”

“While the decision to pause is not entirely unjustified, given the clear lack of efficacy of monetary policy actions through the policy rate cut channel, what was worrying is that the RBI did not announce any unconventional measure but hoped for better transmission of its past actions despite the fact the weighted average cost of lending of scheduled commercial banks between December 2018 and October 2019 actually increased by 5 bps against a policy rate cut to the tune of 135 bps.”

Reporting by Chris Thomas, Nivedita Bhattacharjee, Chandini Monnappa and Derek Francis in Bengaluru; compiled by Uttaresh.V

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