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Last Updated : Jun 02, 2015 12:26 PM IST | Source:

'RBI delivered what market expected, not what it hoped for'

The central bank today expectedly cut interest rates by 25 basis points but its commentary spooked markets.

12.20 pm: With that, we bring the live coverage of the RBI monetary policy meeting to an end.

12.15 pm: To sum up, the Raghuram Rajan-led Reserve Bank expectedly cut interest rates by 25 basis points today but it was not enough to please the stock market, which fell sharply. This was largely thanks to what participants percieved as hawkish commentary going forward.

The bond market reaction, however, was more muted.


Going forward, the central bank said future data on growth and inflation will drive its decisions on policy ahead. But it did raise its inflation forecast a bit, owing to worries on the monsoon and crude oil bounceback.

Some analysts, however, said stocks overreacted today and maintained that if inflation does not spike as expected, one more rate cut later this year could well be in the offing.

12.00 pm: The RBI's worry on oil price bounceback and a poor monsoon-led inflation perk-up may be overdone, says economist Taimur Baig.

"I am hoping the RBI is wrong," he says. "We believe much of the oil price bounceback is done. I am also confident about this government's food stock management ability, which will keep food prices in check even if monsoon turns out to be bad."

"As a result, I believe there is one more 25 basis point rate cut down the year."

11.55 am: "Everyone was expecting a 25 basis point cut but they were hoping for 50 bps," Edelweiss chief Rashesh Shah tells CNBC-TV18, explaining the violent market reaction today.

"Maybe the RBI is seeing something we don't. It could be seeing stagflation, which would be very harmful for corporate earnings."

11.50 am: The market, meanwhile, has sold off even more, now down about 1.4 percent. The Bank Nifty is badly hit.

11.45 am: "We had expected the monetary policy meeting to come up with dovish action but hawkish guidance," says JPMorgan India chief economist Sajjid Chenoy. "It exactly happened like that."

11.40 am: The RBI monetary policy document revealed a grim picture of the agriculture sector.

“Contingency plans for food management, including storage of adequate quantity of seeds and fertilisers for timely supply, crop insurance schemes, credit facilities, timely release of food stocks and the repair of disruptions in food supply chains, including through imports and de-hoarding, need to be in place to manage the impact of low production on inflation,” the RBI said in the policy document.

Read more here.

11.35 am: When asked about the RBI's decision to cut rates thrice this year, and to comment on rumours whether these were to "please the government", Rajan takes it laughingly in his stride.

"It's a no-win situation, really," he says. "If I cut interest rates, [they say] it's because I want to please the government. If I don't, I'm having a fight with it."

11.30 am: While inflation has held steady, here are three factors the RBI believes may play spoilsport. Read here.

11.24 am: Replying to a question why banks are yet to transmit the full 50 basis point rate cut into lending rates till now, Rajan said that banks' cost of funds was reducing steadily and that should reflect in rates soon.

11.20 am: The RBI has downgraded FY16 gross-value added growth forecast from 7.8 percent earlier to 7.6 percent.

11.16 am: "Whatever room we had, we have made use of it. In fact, I would say we have erred slightly on the side of boosting investment [rather than trying to keeping inflation in check]."

11.14 am: From Raghuram Rajan's press conference: "We have done what we think is appropriate given the data. If the monsoon turns out to be better than forecast or government actions contain inflation risks, we will see [about future rate cuts] later."

11.10 am: The RBI chief also urged banks to pass through the sequence of rate cuts into lending rates.

11.06 am: With Rajan indicating a long pause on rates going forward, the Nifty (along with the Bank Nifty) have predictably sold off. Bond yields, however, are largely unchanged.

11.04 am: The monetary policy statement, however, is starkly hawkish. 

In the statement, central bank chief Raghuram Rajan says the risks to inflation, given some challenge on the monsoon and the recent bounceback in crude prices, remain. The RBI has upped its inflation target for January 2016 at 6 percent, higher than its recent 5.8 percent forecast.

What then is the rationale behind the rate cut?

"Banks have started passing through some of the past rate cuts into their lending rates, headline inflation has evolved along the projected path, the impact of unseasonal rains has been moderate so far, administered price increases remain muted, and the timing of normalisation of US monetary policy seems to have been pushed back. With low domestic capacity utilization, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate today."

11.02 am: The repo rate is now 7.25 percent. Consequently, the reverse repo rate moves lower to 6.25 percent.

11.00 am: Here it goes. The Reserve Bank of India has slashed the repo rate by 25 basis points, as was widely expected. Key ratios, such as the CRR and SLR, are unchanged.

10.55 am: Market experts say the stock market has already priced in a 25 basis points rate cut today and may even correct if it comes through -- the classic 'buy on expectations, sell on news' theory at work -- and add the RBI's commentary would be more important.

Read Vibhav Kapoor's interview on the subject here.

In the case of no rate cut coming through, equities will almost surely sell off.

10.50 am: So what are arguments for and against a rate cut today?

Economists say recent inflation data has remained firmly below what the central bank is comfortable with.

Leading growth indicators, on the other hand, continue to give out mixed signals on whether the economy has recovered strongly, the recent GDP data notwithstanding.

Further, with the US Federal Reserve expected to hike its own interest rates later this year (which could put upward pressure on the dollar), some believe the window for a rate cut back home is short (as it could put downward pressure on the rupee).

The only risk that may give the RBI reason to pause, according to Nomura economist Sonal Varma, is that of monsoon turning out to be below normal, which could drive food prices higher in the months ahead.

10.45 am: Welcome to live coverage of the Reserve Bank of India's bi-monthly policy review meeting. Economists, bankers and bond dealers almost believe unanimously believe the central bank will likely cut the benchmark repo rate, for the third time this year, by 25 basis points today.

Will it? We'll find shortly. Stay tuned.

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First Published on Jun 2, 2015 10:50 am
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