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RBI leaves key rates untouched; Experts see cuts ahead

Published on Tue, Jan 27, 2009 at 12:26 | Source : CNBC-TV18

Updated at Wed, Jan 28, 2009 at 11:00

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The Reserve Bank of India has left all key rates unchanged at its policy meet. The reason for not changing any of the policy rates is largely because it thinks that what has already been acted has not been transmitted to credit markets. The central bank also expects the economy to worsen further and so has revised its GDP growth target from 7.5% to 7% with a downward bias for FY09.

Experts react:

Gaurav Kapur, Senior Economist, ABN AMRO Bank believes that the monetary policy will have to adjust to this rapid slowdown, growth and inflation coming off. According to him, one has to basically divide whatever monetary ammunition is left with the RBI over the next 3-6 months. "It is quite clear that RBI has just taken this opportunity like in October 2008 to reassess the situation to actually put across its thoughts to the market and other market participants in general."

Kapur sees room for further cuts. "Reverse repo can bottom out around 3% because I am assuming that same is bank rate, which is 3.5% and will be maintained where it is and that would act as a natural floor for the reverse repo rate."

Nilesh Shah, ICICI Prudential AMC is of the view that RBI is trying to balance market expectation and is also giving a hint that rates cuts will be in the offing especially during the time when the government based on the election code of conduct will not be able to take fiscal steps. That's the time when RBI will be firing all its bullets and that when probably ten-year yield will be below 5% and maybe all the way to the medium-term inflation target of RBI, he added.

Shah is of the view that the banking stocks are facing the dual fight between falling interest rates resulting into better treasury profit, vis-�-vis the concern for non-performing assets. "You have bouts of days when banking stocks underperform and then suddenly it recovers. We are going to see that kind of tug of war for the banking sector and probably banking stocks will remain, where they are through these ups and downs. Valuations are fairly attractive for the Indian banking system vis-�-vis what their financial fundamentals are."

Shah believes that the market is pricing in ten-year yields going below 5% over next three-four months. "The RBI's target of specifying long-term inflation or medium-term inflation trend between 4-4.5% also gives the comfort that the ten-year yield could actually go towards that level. Last time in 2003 RBI probably kept ten-year yield fewer than 5% because they believed the long-term inflation trend was at about 5%. The second thing which they are talking about is that they will be looking at all levels, all kinds of inflation indices is kind of preparing the market not to become over bullish when inflation number starts negative between May and September 2009."

Suman Bery, Director General, National Council of Applied Economic Research sees a number of issues in the policy. According to him, they are stressing that the Consumer Price Index (CPI) matters as much as the Wholesale Price Index (WPI) as they have been drawing attention to that. "There is a consensus out there and they themselves have been reporting on some of this that in as fast moving an environment as we are seeing these days, this twelve month rate is not a good guide to policy. They themselves had done work on seasonal adjustments before but for some reason they had not been using it, they had been reporting it and I think the dynamics have been becoming much more complicated."

Bery is of the view that there is a sense that what has happened in the oil price is quite an important automatic stabilizer on both the growth and inflation side - letting that kind of ride itself out. He thinks that they are very concerned that the exchange rate remain well behaved because a lot of the impact both on expectations and on inflation could come through the exchange rate channel but if the exchange rate is well behaved both because of expectations and because of fundamentals that makes the RBI's job easier.

Pravind Kadle, MD, Tata Capital said another rate cut by RBI would have been very useful, but banks participation is also must. In the last couple of months, RBI has taken lot of actions without waiting for the policy announcement and so to some extent they have done their job.

Meanwhile he said it's not the interest rate alone which is to be considered when we are raising money, one also needs to keep in mind that those days when RBI used to increase or decrease interest rate only at the time of policy announcement, have gone. Such kind of decisions they have been taking without waiting for the policy announcement. "For a successful NBFC to depend only on the banking channels is not the right policy. We are the new players in the NBFC field today and we need to broadband our investor base, we need to look at alternate channels and not just the banking channels."

According to Kadle, interest rates will fall down and for the higher investment policy more than RBI's monetary policy lot of things need to be done in terms of the policy announcement with regards making the investments in infrastructure projects. "There are no investments right now happening and that is what is needed to be done, confidence needs to be built into the whole system. It is not just the role of only the monetary policy. We are looking at retail bonds; retail fund raising."

Jehangir Aziz, Chief Economist, JP Morgan believes that there was a bit of inconsistency between the language of RBI release and the action of not changing any of the rates. He is of the view that as the growth situation unfolds there might be more aggressive rate cuts coming through. "Given the degree of slowdown, I would say at least another 100-150 bps cut in the reverse repo but at the same time, I don't think that is the only thing that the RBI needs to do. I think the RBI needs to get the banks strengthen their balance sheet."

According to Aziz, once the banks restructure their portfolio and get the portfolio in the stronger position, there will be a much better situation to push credits up. "It will be unwise for us to expect banks to push out a huge amount of credit when the economy is slowing down. That will be a dangerous thing to do, so they need to put their portfolio, strengthen their portfolio before pushing more credit out. So it is not just rate cuts but it is also getting the banks to strengthen the portfolio."

Hemant Mishr, Head Global Markets, Standard Chartered Bank expects the ten year benchmark to find support at around 6%.

Commenting on RBI's policy he feels that the policy is clear, the tone is dovish. He expects interest rate cut over the next couple of months. "Our own stance is for 150 bps repo rate cut and if the need be 150 bps of CRR as well."

B Prasanna, MD of Primary Dealership at ICICI Securities said the traders were well prepared for today's policy being a no event kind of a policy because RBI has gone ahead and cut rates well ahead of the policy.

Anant Narayan, Head-Treasury, Deutsche Bank sees more rate cuts in the offing.

According to Narayan, one clear concern in terms of bond yields is the supply angle. "Given the situation that we are in, given the fiscal deficit, it is clearly double or more of what it was scheduled to be and given the duration which is being pumped into the markets by way of extra bond borrowings that is going to clearly have an impact on the way yields move going forward." He feels that there is action possible from Ministry of Finance (MoF) and RBI which gets easier situations; one is that they can think about reducing the duration of the issuances that they do to tide over what should be a temporary crisis and secondly possibly they can improve and open the tabs for FIIs to buy into government debt given that there is a lot of stress in the banking system right now in India domestically to service both the government debt as well as private sector borrowings.

Narayan is of the view that overnight rates will not go beyond 4.25%, there is a good chance that it might come down to 3%, bond yields therefore should come down in consonance, the carry between 6% ten- year and a 4.25 overnight rate even currently is quite healthy even to manage the increase in supply. "We should head towards 5% over a period of time as the market factors in more cuts but clearly beyond that we will depend upon what kind of supply we are looking at and what kind of duration is being pumped into the market."

Anand Tandon, Director-Equities, Brics Securities said policy rates not getting changed was somewhat expected. He is of the view that from here on the pressure would be from the government borrowing that is going to keep the interest rates up at a certain level because the borrowing program has increased and will continue to increase. He expects to see some more rate cuts going ahead.

Tandon said the perception of risk is still fairly high and he would still continue to maintain reasonably high levels of interest rates than making forecast to corporates right now.