All six members of the Monetary Policy Committee (MPC) voted for cut in repo rate, the rate at which RBI lends to banks
Reserve Bank of India June 6 expectedly cut repo rate by 25 bps and changed its policy stance from neutral to accommodative citing growth concerns.
"We reduce the policy repo rate under the liquidity adjustment facility (LAF) to 5.75 percent from 6.0 percent with immediate effect. Consequently, the reverse repo rate under the LAF stands adjusted to 5.50 percent and the marginal standing facility (MSF) rate and the Bank Rate to 6.0 percent," the Reserve Bank said in its statement.
All six members of the Monetary Policy Committee (MPC) voted for a cut in repo rate, the rate at which RBI lends to banks.
> H2FY20 CPI inflation estimate revised down to 3.4-3.7 percent from 3.5-3.8 percent though H1FY20 inflation estimate increased to 3-3.1 percent from 2.9-3 percent.
> FY20 GDP growth forecast cut to 7 percent from 7.2 percent
RBI said a sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern. "The headline inflation trajectory remains below the target mandated to the MPC even after taking into account the expected transmission of the past two policy rate cuts," it said.
Hence, there is scope for the MPC to accommodate growth concerns by supporting efforts to boost aggregate demand, and in particular, reinvigorate private investment activity, while remaining consistent with its flexible inflation targeting mandate, it said.
The central bank has not mentioned any special package for NBFCs barring the appointment of the working group to look at liquidity problem.
We have collated experts views on the Monetary Policy Committee's interest rate decision:
Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company
The cut in repos rate was broadly in line with expectations. The shift in gear from neutral to accommodative removes ambiguity wrt the direction of rate action. The growth focus, without losing sight of inflation seems to have prompted this move.
Liquidity in the banking system has seen a movement from deficit to positive zone. It is important to see this situation continues to ensure credit transmission. India rates would continue to find anchor and maintain a softening bias going forward.
Jagannadham Thunuguntla, Senior VP and Head of Research (Wealth), Centrum Broking
With RBI's 25 bps cut, the repo rate in India has reached to 9-year low level of 5.75 percent. Even though RBI had changed the stance to accommodative, the leg room for further rate cuts is limited. Further, the repayment delay by DHFL (with outstanding loan of Rs.1.1 lac crores) is way too big a strain for the market considering IL&FS default (to the tune of Rs.90,000 crore) itself remained unaddressed after 10 months of default.
Further, ongoing Trump’s tweets for further tariffs on China has added fuel to already unsettled global geo-political sentiment. All in all, the markets have turned risk averse with the worries associated with contagion risk. In this backdrop, new finance minister’s first Budget in first week of July holds key to change the narrative from defaults to durable growth.
Gaurav Dua, Sr VP, Head – Strategy & Investments, Sharekhan by BNP Paribas
Rate cut and moderation in GDP growth forecast is in line with expectations. Clearly the chance in stance and the commentary indicates that the rate cut would continue in the next two or more forthcoming policy review meet this year. RBI has also indicated some measures to ease liquidity with stance of maintaining a surplus on LAF window rather than deficit.
A working group of liquidity will also be formed to ensure transmission of rate cuts to borrowers. Bond yields have already rallied on expectations and could again soften further after a temporary hardening led by profit booking by some banks. We continue to retain positive view on banking sector.
Amar Ambani, President & Research Head, YES Securities
In a fairly Dovish policy, the RBI, as we anticipated, not only reduced the Repo rate by 25 basis points, but also changed its policy stance to accommodative, from neutral. More importantly, the RBI has addressed the liquidity crisis in the system with open market operations, turning LAF into surplus in early days of June 2019. It has assured of liquidity support as and when needed. We have factored in another 25-basis point Repo cut in the year 2019 itself.
Umesh Mehta, Head of Research, Samco Securities
This is the third consecutive time that RBI has cut rates by 25bps which shows that they are indeed taking care of the slowing growth and as expected are being supportive by loosening their purse. Indian economy has been experiencing a slowdown with unemployment at 45-year highs, CPI inflation excluding food and fuel down to 4.5 percent in April from 5.1 percent in March and a revision by the RBI on the GDP for FY20 from 7.2 percent to 7 percent indicates just that.
This is positive for the Street, however, as the rate cut was inline with expectations which had already been factored in, the indices did not cheer the rate cut and continued to trickle down. If the international trade tensions continue to escalate further, the Fed might cut rates which will further create room for RBI to reduce rates in future.
Garima Kapoor, Economist, Elara Capital
Drawing comfort from consistent softness in inflation trajectory, MPC cut the repo rate for a third time this year to support benign growth conditions. A shift in the stance to accommodative is welcome as it will pave way for transmission to lending rates, which so far have been inadequate.
We expect MPC to cut rates by an additional 50 bps through the year while continuing to finetune liquidity support through a combination of OMO purchases, forex swap and CRR cut.
Suvodeep Rakshit, Sr Economist, Kotak Institutional Equities
RBI reduced repo rate by 25 bps as expected. The change in stance to ‘accommodative’ was a bit of a surprise. Debt markets will take this as a significant positive move, though most of the rate cut cycle is probably over. The tone of the RBI policy was dovish and highlights the concerns on growth.
We maintain our call for another 25 bps rate cut in August factoring in the benign inflation trajectory and the growing concerns on growth. However, the transmission of the rate cuts will be key and the RBI should aim to maintain the liquidity, at least, at neutral over the next few months.
Naveen Kulkarni, Head of Research, Reliance Securities
While the rate cut of 25 basis points was in line with our expectation, concerns over growth and challenges regarding liquidity continue to linger. The market is not necessarily cheering the rate cut as it had already factored in and something more was expected.
Joseph Thomas, Head Research- Emkay Wealth Management
The RBI policy announcement is exactly on the same lines as expected by most of the market participants. The repo rate cut of 0.25 percent and the change of stance from neutral to accommodative is key to supporting the sagging economic growth. The projected growth has been lowered to 7 percent.
The policy also has broad indications of more action on the liquidity front from the RBI in the coming days. This also confirms the commitment of the Central Bank to better transmission of the rate cut effects through liquidity.
VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services
The MPC should be appreciated for coming up with the right policy at the right time. The 25 bp cut in policy rates along with the change in stance to accommodative from neutral is eminently desirable.
The scaling down of the GDP growth rate to 7 percent and inflation target to 3.4 to 3.7 percent for FY20 will ensure that the policy will remain accommodative for some time.
The 10-year bond yield is likely to remain at sub 7 levels for an extended period of time. The Governor’s assurance that adequate liquidity will be provided will ensure that the present surplus liquidity situation will sustain.
Amit Gupta, Co-Founder and CEO, TradingBells
RBI has announced a rate cut of 25 basis points fueled by a stable government, sharp decline in crude oil prices and a slowdown in the economy. RBI changed its stance to accommodative and a possibility of further rate cuts this year remains open (we can expect a further rate cut of 50 to 75 basis points in 2019).
Real estate, NBFC, banking and auto sectors would be the key beneficiaries of this rate cut where a temporary uptick can be seen in many stocks but quality stocks will continue to outperform.
Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers
Low inflation and subdued growth are the drivers of the move. Yet, the real concern is the lack of transmission of rate cuts into the effective lending rate. Liquidity conditions also remain tight for a large part of the corporate sector.
Shishir Baijal, Chairman & Managing Director, Knight Frank India
The rate cut is certainly a welcome step, especially for the real estate sector. The benefit of a lower policy rate in terms of better credit cost as well as higher liquidity will hopefully be transmitted further by banks to NBFCs as well as home buyers. Also, the change in policy stance from neutral to accommodative is a welcome shift as it lays ground for further rate cuts.
The cash-crunched NBFCs will definitely benefit from the inflow of capital which will, in turn, benefit developers as well as home-buyers. NBFCs have been facing a liquidity crisis and this has negatively impacted their loans to real estate, including construction finance. Besides capital infusion into this important financier segment, this rate cut will also improve the home-buyers affordability and stimulate housing demand at this critical juncture.
Ananth Narayan, Professor at SPJIMR to CNBC-TV18
The change in stance to 'accommodative' suggests the MPC is going in the right direction and I hope the real reforms on fiscal, NBFC and liquidity front coming.
Six points - repo rate cut by 25 bps, change in the stance, 6-0 vote for rate cut, reduction in inflation forecast, cut in growth forecast and reasons for change in policy stance - indicate bullish statement from RBI.
The reduction in leverage ratio to 4 percent from 4.5 percent is a good sign allowing banks to lend more. In fact, it is a positive for credit growth though it is a small step to improve liquidity.
Kamal K Mahajan, Bank of Baroda to CNBC-TV18
This policy will help build confidence for banks. We expect certain liquidity measures in the near term.
The transmission of repo rate cut will take place in the next one or two months.
Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank to CNBC-TV18
It is a fairly dovish policy and broadly in line with expectations.
In fact, the entire package including revised down growth forecast, 6-0 vote to repo rate cut, etc. is very dovish and is a pleasant surprise.
RBI and MPC are trying to provide proper communication which has brought clarity to the market.
Jayesh Mehta, MD & Country Treasurer, Bank of America to CNBC-TV18The bond market will be very constructive and yields will move near 6 percent levels in the near term.Subscribe to Moneycontrol Pro and gain access to curated markets data, exclusive trading recommendations, independent equity analysis, actionable investment ideas, nuanced takes on macro, corporate and policy actions, practical insights from market gurus and much more.