Taimur Baig, MD & Chief economist at DBS Group Research also sees one more rate cut of 25 bps, which is pretty reasonable to do as growth is slowing down and RBI kept its accomodative stance.
The Reserve Bank of India (RBI) finally delivered on August 7 by cutting interest rate for a fourth time in a row, taking the repo rate to 5.4 percent, its lowest levels in last nine years, citing economic slowdown and NBFC liquidity crisis.
While retaining its “accommodative stance”, the central bank cut repo rate, at which it lends money to bankers, by 35bps, which was in between the street expectations of 25bps and 50bps. Four of the six monetary policy committee members voted for a 35bps cut, the other two were voted for 25bps.
Experts welcomed the move, saying it was along expected lines given the slowdown in economy, relentless liquidity crisis in non-bank financial companies (NBFCs) and global trade tensions.
When the global central banks were thinking of either rate cut or more stimulus to keep the growth engine on track, a rate cut was obvious for India, they said.
"The rate cut was on pretty much expected lines given the slowdown, but the key things to look at are what happens to the liquidity and rate-cut transmission frameworks. GDP growth lowered for FY20 but it could be lowered than that," Ananth Narayan, Associate Professor, Finance, at SPJIMR, said in an interview to CNBC-TV18.
The transmission of policy repo rate cuts to the weighted average lending rates (WALRs) on fresh rupee loans of banks has improved marginally since the last MPC meeting. Overall, banks reduced their WALR on fresh rupee loans by 29 bps during the current easing phase so far (February-June 2019), the RBI said in its release.
The RBI cut its FY20 GDP growth target to 6.9 percent from 7 percent and sees the same at 5.8-6.6 percent in first half of FY20 & 7.3-7.5 percent in second half of this year, with risks somewhat tilted to the downside. The central bank expects April-June 2020 GDP growth at 7.4 percent.
"Various high-frequency indicators suggest weakening of both domestic and external demand conditions. The Business Expectations Index of the Reserve Bank’s industrial outlook survey shows muted expansion in demand conditions in Q2, although a decline in input costs augurs well for growth," the central bank said.
The RBI policy stance was clearly pro-growth, Mohit Ralhan, Managing Partner & CIO, TIW Private Equity, told Moneycontrol. “The measures taken to increase flows to NBFC is credit positive and will enhance lending. The policy stance has been retained as accommodative and the benign inflation outlook means one can expect more cuts in future," Ralhan said.
The RBI has taken several other measures to ease NBFC crisis. "We took measures to enhance flow of credit to NBFCs. We raised banks' exposure to each NBFC to 20 percent of bank Tier-I capital from 15 percent earlier," the central bank said. Lending to NBFCs for agriculture up to Rs 10 lakh, MSMEs for agriculture up to Rs 20 lakh and housing for agriculture up to Rs 20 lakh has been "classified as priority sector lending”.
Most experts expect another rate cut in next policy meeting scheduled from October 1, 2019.
"We are not surprised by 35 bps rate cut. We expect another 25 bps rate cut by end of this year or in next policy meeting given global and domestic slowdown," Kaushik Das, Chief Economist at Deutsche Bank, said in an interview to CNBC-TV18.
If it happens, then it could be heavy monetary policy lifting by RBI beyond which it need not do much, Das said. The RBI has to focus on NBFCs, HFCs crisis, he said.
He feels there is no possibility of rate cut in 2020 but policy rate could go below 5 percent if NBFCs problem persists. Das expects GDP growth at 6.5-6.6 in next year if NBFC crisis gets resloved and global growth settles down.
Taimur Baig, MD and chief economist at DBS Group Research, also sees one more rate cut of 25 bps.
"We are waiting to hear more related to liquidity framework and transmission framework. We salute if RBI takes strong measures related to NBFCs, liquidity issues. Lower rate is not helping India as there are many global factors at play," he said.
The RBI demonstrated boldness by an unconventional reduction of 35bps, showing an urgent need to take pressure off the bond markets and reduce the cost of capital in the economy to kickstart the investment cycle from the private sector, Jimeet Modi, Founder & CEO, Samco Securities said. “Increasing the bank exposure limit to a single NBFC from 15 percent to 20 percent is indeed RBI’s way of managing the current crises, thereby addressing the liquidity squeeze caused by the NBFCs. The policy will genuinely percolate liquidity into the system giving immediate relief to the economy,” he said.
Considering factors-—such as likely crude volatility, soft outlook for CPI inflation excluding food and fuel etc— and the impact of recent policy rate cuts, the path of CPI inflation is projected at 3.1 percent for second quarter of FY20 and 3.5-3.7 percent for second half of FY20, with risks evenly balanced, the RBI said.
The MPC noted that inflation is projected to remain within the target over a 12-month ahead horizon. Addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture, while remaining consistent with the inflation mandate, it said.
The RBI expects CPI inflation for first quarter of FY21 at 3.6 percent.
Here is what other experts say about RBI monetary policy:
Rajiv Singh, CEO, Karvy Stock Broking
While we were hoping 50 bps rate cut, the RBI has chosen unconventional cut of 35bps which is mildly positive for the market. However, RBI cutting its estimation of GDP growth rate below 7%, while widely expected, may not go down well with the market in short term. Overall this is an accommodative policy and in tune with other developed and emerging market trends. Certain other macro prudential measures like enhancement of credit limit to individual NBFC to 20 percent from 15 percent of a Bank's Tier I capital is good.
The RBI has pointed out that while transmission of rates has occurred through money market, banks are yet to pass on the rate cuts to real economy. Overall, this is a good policy and should help improve liquidity, consumption and demand scenario in the economy albeit with a lag. We continue to expect further cuts from the RBI, as based on the current inflation projections, there is further room for RBI to cut rates and boost the economy.
K Joseph Thomas, Head Research - Emkay Wealth Management
The RBI policy , especially the repo rate cut of 35 bps, takes cognizance of the need to bring down interest cost on liquidity and credit, to support the sluggish economic growth and to stimulate aggregate demand.
The success of this accommodative policy would depend entirely on the next level of its application, that is, the transmission of the lower rates to the ultimate borrowers. The banks seem to be seized of this need and effective cascading of the benefits of lower base rate may happen over the next few months.
Dheeraj Singh ,Head of Investments, Taurus Asset Management
The committee seems to have tried to tread a middle path by cutting rates but by an odd amount of 35 basis points instead of the usual 25 bps or 50 bps. Markets had already factored in 25 bps cut and so a 25 bps cut may not have enthused markets and therefore done little to address growth concerns.
The committee however seemed to view a 50 basis point cut as a little excessive especially in view of the fact that rates have been reduced in the recent past, the benefits of which have yet to be passed on to customers by the banking sector.
Jimeet Modi, Founder & CEO, Samco Securities
RBI has demonstrated boldness by an unconventional reduction of 0.35 percent showing an urgent need to take pressure off the bond markets and reduce the cost of capital in the economy to kickstart the investment cycle from the private sector.
Increasing the bank exposure limit to a single NBFC from 15 percent to 20 percent is indeed RBI’s way of managing the current crises thereby addressing the liquidity squeeze caused by the NBFCs. The policy will genuinely percolate liquidity into the system giving immediate relief to the economy.
Dinesh Rohira, Founder and Chief Executive Officer at 5nance.com
After the Fed cut last week, the yield curve in the US has inverted. In India the situation is better as the yield curve is normal but the difference in yields between long duration bonds and REPO has reduced. The Reserve Bank of India during its August bi-monthly MPC meet slashed the policy repo rate for a fourth consecutive period, with 4 officials voting for a rate cut by 35 basis points which now stands at 5.4 percent. The RBI has taken a middle ground where markets were expecting a 25bps to 50bps rate cut.
The 10 year GSEC yields have immediately remained stable, steepening the yield curve. The GDP growth target has been reduced to 6.9 percent from 7 percent, hence growth is now the highest priority as per commentary. Inflation is targeted at 4 percent, the numbers are well below the target. NBFCs have been given a liquidity boost, banks can now take exposure of 20 percent of their Tier-I capital in one NBFC from 15%. NBFCs can now on-lend to the priority sector through banks. This will bring liquidity stimulus to the NBFC/HFC space, the abundance of liquidity provided by RBI needs to transmitted and absorbed in the system. There is a cyclical demand and investment slowdown, expansionary credit growth can change this downward trend. A steeper yield curve also incentivizes future growth.
Romesh Tiwari, Head of Research, CapitalAim
A rate cut of 35 Basis point by RBI is along the unexpected line and will certainly help to increase liquidity. Increased limits for exposure limit to single NBFCs from lending bank up to 20 percent will help revive the lending activities of NBFCs. No change in Cash Reserve Ratio is a bit disappointing. RBI acknowledged the slowdown in domestic as well as external demand and revised the Real GDP growth down to 6.9 percent from 7 percent.
Overall, RBI’s response is appropriate for the liquidity crisis, but its effectiveness will depend on the transmission of benefits of lower rates to end-users. I see an immediate positive impact on real estate, two-wheeler, and consumer durable companies ahead of the festival season. Hero MotoCorp, TVS Suzuki, DLF, Asian Paints and Godrej Properties.
Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities
The RBI continued with the rate cut cycle but in a surprise change to the quantum, reduced repo rate by 35 bps. While this induces some uncertainty in market expectations of the quantum of rate changes, it provides the RBI MPC with a greater degree of flexibility in signalling their intent. The 35 bps rate cut should be seen as a signal that the RBI MPC is quite concerned with the growth outlook beyond the usual 25 bps rate cut in a business-as-usual scenario (even though it does not reflect in the revised FY2020 GDP growth estimate).
The RBI MPC did not necessarily want to deliver a 50 bps rate cut and hence retains the scope to reduce rates further. With inflation expected to remain benign, and further downside to growth outlook, we see scope for 25-50 bps of further rate cuts through FY2020. Transmission to lending rates will likely remain weak unless there is a clear visibility of adequate liquidity sustaining over the medium term.
SS Mallikarjuna Rao, MD & CEO, Allahabad Bank, told CNBC-TV18
It is very positive indication for market and 35bps is a welcome step. We will think of deposit rate cut in coming days.
In case of NBFCs also it is a welcome move and banks already started lending to same. NBFC measures are to tie over current liquidity problem and NBFCs itself should think of solving asset liability mismatch.
Bhaskar Panda, Senior Vice President, Treasury Advisory Group at HDFC Bank, told CNBC-TV18
Everybody was expecting and RBI delivered in between 25-50bps. The bigger point is RBI projections of CPI inflation at 3.6 percent for April-June 2020.
Given that even something more might be coming in future monetary policy committee meetings.
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