It was a mistake by RBI not to raise interest rates in the October policy. We are in a global tightening environment and India does not live in a vacuum, said Taimur Baig, chief economist at DBS
The S&P BSE Sensex extended fall and plunged over 900 points on Friday after the Monetary Policy Committee (MPC) in a surprise move kept policy rates unchanged at 6.5 percent, which most experts say is a ‘mistake’.
The decision of the MPC is consistent with the stance of calibrated tightening of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent while supporting growth.
Reacting to the MPC meeting outcome, the Indian rupee hit a fresh life-time low above Rs 74/USD mark for the first time. The central bank changed the stance from ‘Neutral’ to ‘Calibrated Tightening’.
“The hold on policy rates has come against the market expectation of a 25 bps rate hike. But the change in stance from neutral to 'calibrated tightening' is indicative of the likely tightening to come depending on evolving data,” VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services told Moneycontrol.
Here is a list of experts who reacted post the MPC meeting:
Taimur Baig, chief economist at DBS to CNBC-TV18
It was a mistake by RBI not to raise interest rates in the October policy. We are in a global tightening environment and India does not live in a vacuum. The US Fed is raising rates, emerging markets are raising rates, it puts the onus on the RBI to follow the trend.
The issue number 2 is that given where demand and prices are, it makes sense for the RBI to remain on hiking trend. The fact that rupee has sold-off so much it doesn’t help that the central bank has taken a pause today.
Abhimanyu Sofat, Head of Research, IIFL Securities Ltd.
RBI policy announcement of keeping rates unchanged is a surprise; this may lead to a negative impact especially the currency market. With the US yield, inching up to 3.25 percent it was expected the RBI would increase the rates to protect against inflation rise.
We believe because of the policy one should continue to focus on export-oriented &import substitution stories from both the service and manufacturing sector.
The presumption of lower inflation due to lower food prices may be a bit incoherent as core inflation may rise due to the depreciating currency. If the crude prices continue to surge then RBI may have to come with front loaded rate increases.
Rajiv Sabharwal, Managing Director & CEO, Tata Capital
The performance of rupee against the USD in the medium term will impact various macroeconomic indices. The regulator will continue to monitor domestic liquidity. This pause will, however, be temporary and we could see a rate hike in the near future. The NBFC/ HFC sector will continue to take prudent measures in building its asset book.
Abheek Barua, Chief Economist, HDFC Bank on RBI Policy
This is a risky move by the RBI since the market was positioned for a rate hike, purely as a rupee defence. In its absence, currency and asset markets could see sharper corrections. A narrow focus on inflation targets perhaps not desirable in the middle of a financial crisis. Change in the stance suggests that the rate hike could still come in the coming months.
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services
The hold on policy rates has come against the market expectations of a 25 bp rate hike. But the change in stance from neutral to 'calibrated tightening' is indicative of the likely tightening to come depending on evolving data.
The RBI’s surprising policy announcement is the consequence of its confidence on benign inflation, which in turn, stems from the softening of food prices.
Since the Indian economy, like many other emerging markets, are presently in the cross-currents of global developments, the RBI is likely to be on guard keeping a strong vigil of the US 10-Year bond yield and crude oil prices.
Shishir Baijal, Chairman & Managing Director, Knight Frank India
The RBI had hiked the policy rates by 50 bps in the previous two policy reviews. Despite global and domestic macro-economic headwinds of rising interest rates in the US, rising crude prices, threat of crude oil fuelled inflation, weaker currency and FII outflows, RBI has paused rate hikes for now. While we are in a rising interest rate cycle now, the pause will provide a temporary relief to the home buyer sentiment and support the festive season demand.
Soumen Chatterjee, Director Research, Guiness Securities
Rupee hits all time low at 74 to USD as the policy decision works against Interest Rate Parity. However, RBI's focus to support Domestic Growth amid Challenging Global Economic Conditions will gradually support Rupee in near-term.
Deepak Jasani, Head Retails Research at HDFC Securities
Contrary to most expectations, the RBI’s MPC chose to keep repo and reverse repo rates unchanged at its meet on October 05, 2018. It seemed to be influenced by risks to future growth from tighter financial conditions and encouraged by softer inflation projections. In the process the MPC chose to go contrary to the stance of most other Central Banks which may not be conducive for the value of Rupee.
However, the MPC changed its stance from 'Neutral' to 'Calibrated Tightening'. The stock markets which would in normal case be happy with no hike, resumed its fall after a small bounce, as if the markets were waiting to sell-off post the event whatever be the outcome. Markets would closely watch the crude oil price trend and interest rates trajectory in the US for clues to reverse its current trend.
Sampath Reddy, CIO Bajaj Allianz Life
Monetary Policy Committee (MPC) decided to keep the policy rate unchanged. This was a positive surprise for the markets with the consensus expectation being a hike of 25 bps. Inflation estimates remain within control, with headline inflation projection for H2FY19 being lowered by ~50bps in a scenario of benign food inflation.
The outcome has been taken favourably by the markets with an easing of bond yields post policy, however the move could have some weakening bias in Rupee.
With MPC changing the stance from neutral to calibrate tightening, it might want to wait and watch growth-inflation dynamics going ahead. We feel that future monetary policy action will continue to be data dependent.
Shailendra Kumar, CIO & Director, Narnolia Financial Advisors
RBI surprised the street with keeping repo rate unchanged as it has revised its inflation forecast downward. MPC says food inflation has remained unusually benign. But this surely is near-term negative for rupee in a global macro environment where most of the central bankers are in tightening mode and appetite for investing in emerging market fixed income paper is already low. Though stance has been changed to calibrated tightening keeping future options open.
Foreign funds are staying away from emerging market including India impacting fund flows to both debt and equity market. As things stand, 2018 would be the year of highest net sells by foreigners in Indian debt market since the time they started investing in India. Rising interest rate domestically has impacted the money flow in the financial economy. Issues with NBFC have further added to the woes of credit flow. Just like the RBI policy statement, we need to keep a data-driven approach as the current policy does not eliminate much of the near-term worriesDisclaimer: The views and investment tips expressed by investment experts on Moneycontrol are their own, and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.The Great Diwali Discount!
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