The Reserve Bank of India (RBI) on Wednesday cut its key lending rate —the repo rate — by 25 basis points (0.25 percentage points) to 6 percent, triggering hopes of lower borrowing costs for households and companies ahead of the festival season.
The six member monetary policy committee (MPC), headed by new RBI governor Urjit Patel, were of the view that the moderation in price trends have persisted long enough to warrant lower loan costs, necessary to engineer a quick industrial turnaround and goad people to spend more.
That said, the MPC hinted about lurking inflation risks in the near to medium term. It also flagged concerns about the deceleration in services and industry, placing the onus on the Centre and state governments to hasten project approvals and aid private investment.
Inflation rates have slowed to record lows and food prices have been falling. Consumer price index (CPI) — commonly referred to as retail inflation that the RBI tracks — moderated sharply to 1.54 percent in June, the lowest since the index was rebased to 2012 in a new data series.
RBI Credit Policy: How Interest Rates Work
Here's what fund managers had to say about the monetary policy.
Lakshmi Iyer, CIO (Debt) & Head – Products, Kotak Mutual Fund:
The 25 bps repo rate cut was on expected lines. The market has largely discounted this action and focus would now shift to global events and how they unfold going forward. The CPI target has been maintained for FY 2018. If CPI continues its softening trend, we believe case for an additional 25 bps remains live before end FY 18.
Duration investors are advised to remain invested with the funds. Incremental allocation can be made into credit accrual funds and short term funds.
Pankaj Sharma, CIO – Fixed Income, DSP Blackrock Mutual Fund
The Monetary Policy Committee (MPC) has acknowledged that the trajectory of inflation would rise from the current lows, leading to continuation of a neutral stance whilst maintaining its commitment to keep headline inflation close to 4 percent on a sustained basis.
We expect the states to implement pay commission in a staggered manner whilst the adverse impact on growth looks more imminent as we are yet to fully come out of impact of structural events; viz demonitisation and GST. This adds further comfort for the interest rate cycle to remain in a neutral mode with an outside chance of further easing before April’18 policy.
The MPC policy decision would further strengthen macro stability as we strive to optimise the growth – inflation dynamics; and not leverage one at the cost of other. This augurs well for the domestic financial markets reinforcing the India growth story.
Murthy Nagarajan , Head-Fixed Income, Tata Mutual Fund
RBI has cut policy rates by 25 basis points and maintained its neutral stance on policy rates. RBI has acknowledged the low capacity utilization in the industrial sector, actual CPI inflation undershooting its baseline forecast.
However, RBI has reiterated its concerns on farm loan waiver which could reduce the capital expenditure of state governments, rural demand increasing in the coming months due to good monsoon which could led to higher inflation.
As per RBI projections, CPI inflation is expected to be around 4 percent in the March 2018 excluding the effect of increase in HRA of central government employees.
We feel RBI is conservative in its assessment of macro-economic factors.
We expect CPI inflation to be below 4 percent levels due to continuous deflation in the global economy which should keep commodity prices low.
Good monsoon should keep food inflation under check. This may create room for RBI to further cut policy rates in this year. Accordingly , we expect 10 year Government bond yields to trade between 6.30-6.45 percent in the coming months.
Killol Pandya Head- Fixed Income, Peerless Mutual Fund
The RBI as widely expected cut the Repo rate by 25 bps to 6%. The 5-1 voting in favor of a rate cut also suggests that the decision was almost unanimous.
The trend down in inflation in the last 4 months did indeed create some room and the RBI has seized that chance.We may have just seen the last rate cut in this cycle and the RBI is likely to keep rate on hold for some months as we expect CPI to rise above the 4 percent mark by Q1 2018.
The drop in inflation seems to be the aftershock impact of demonitisation, which should reverse in the months to come.Food prices need to rise from the current levels to assuage some farm stress and the recent rise in vegetable prices could be a sign of it.
RBI’s strong reference to states fiscal deficit and farm loan waivers indicates they do not want to be complacent about oncoming risks to inflation.
The focus should now move back to global conditions with the risks from synchronized tightening by major central banks.We maintain our view that the best of the bond market gains are behind us.
Bekxy Kuriakose, Head - Fixed Income, Principal Pnb Mutual Fund
To some extent the rate cut was factored in money market, bond and gilt yields. We expect prices to be supported in the backdrop of ample banking system liquidity and overall benign macro environment. In the near term the ten year benchmark may trade in a range of 6.30-6.50 percent.
Avnish Jain, Head – Fixed Income, Canara Robeco
As widely expected RBI MPC cut repo rate by 25 bps while keeping stance at neutral. The MPC acknowledged that CPI has dropped dramatically and the upside risks to inflation have either gone down or not materialized. With normal monsoons, the MPC expects food inflation to remain under control. The underlying growth also remains weak with corporate deleveraging and retrenchment of investment demand. With inflation expected to go up from these levels, the MPC is likely to watch incoming data for further policy moves.
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