As expected, the Reserve Bank of India (RBI) left policy interest rates unchanged on Tuesday, ignoring desperate plea from India Inc and the government to lower them, and reiterated its October guidance of further policy easing in the March quarter as it shifts its focus towards boosting growth. The central bank also kept the cash reserve ratio (CRR) unchanged at 4.25 percent, its lowest since 1974.
While the decision to leave the policy repo rate unchanged at 8.00 percent was in line with most forecasts, expectations for a rate cut had grown slightly after data on Friday showed wholesale inflation cooled to its weakest pace in 10 months in November.
"In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards," the Reserve Bank of India wrote in its mid-quarter monetary policy review. The language seems to suggest that there could be a big bang approach to the start of new year, Anant Narayan, Standard Chartered Bank says, adding, even a 50 bps rate cut in January policy is a possibility.
In fact, the Governor had said earlier also he doesn't believe in baby steps and he did demonstrate that by bringing a 50 basis cut, Seshadri, ED, Bank of India recollected in an interview to CNBC-TV18. "I would definitely go with a 50 bps cut in January rather than 25 bps. That is exactly what must have weighed in his (Subbarao's) mind. In fact, no cut now but definitely in January. I would vote for a 50 bps rate cut in January," he states.
However, a disappointed SL Bansal, CMD of Oriental Bank of Commerce feels the RBI has missed the bus. He says the market needed a “feel-good factor”, ergo the steps taken by Government of India (GoI) in the last three months or so to instill confidence in the market.
Not many of the projects are lined up and the only credit offtake is from the retail segment or from the ongoing projects, he says. In fact, Bansal feels bankers should take a position that anyway liquidity is going to be kept comfortable and with a rate cut in January, that there is a room for at least a 10 bps cut in base rates. "The bank should start cutting base rate at least by 10 bps to give indication," Bansal told CNBC-TV18.
Agreeing with Bansal’s assessment, Seshadri says, he would not be surprised if there is a decision to cut the base rate by some fractional percentage at an ALCO meeting. “There has been some moderation in the cost of deposit, it has been going down and we will definitely be discussing and see if we can pass on part of it by way of rate cut,” he says.
Today's move also reinforces the expectation of more open market operations, which is a bond positive. "Barring a bit of a disappointment led selling in the initial part, I expect yields to remain in the same range maybe even head lower as we run into the OMOs," Narayan says.
Overall, the only risk for the bond markets is the actual slippage on the fiscal front. "To that extent, 8.20 should be the cap on the yields in a 10-year bond and we should be heading towards lower yields from 8.15," Narayan says.