Experts agreed that the policy is accommodative, but the final impact will depend on how soon the lower rates are passed on to the end user.
The Monetary Policy Committee (MPC) has reduced repo rates by another 35 basis points to 5.4 per cent in the August Policy review while maintaining an accommodative stance.
While it is apparent that the country is facing a deepening economic downturn, RBI Governor Shaktikanta Das also cited downside risks to global growth among other reasons for the policy stance.
The governor said a 50 basis point cut would have been excessive in the current circumstances, but said the RBI has been pre-emptive with their stance and interest rates.
Here's what experts have to say:
While we were hoping for a 50 bps rate cut, the RBI has chosen an unconventional cut of 35 bps, which is mildly positive for the market. However, RBI cutting its estimation of GDP growth rate below 7 per cent— while widely expected — may not go down well with the market in the 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 NBFCs to 20 per cent from 15 per cent 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 the real economy. Overall, this is a good policy and should help improve liquidity, consumption and demand 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 room for RBI to cut rates further and boost the economy.
The RBI policy, especially the repo rate cut of 35 bps, takes cognisance of the need to bring down the 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.Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers:
The 35 bps rate cut is higher than the consensus and our expectation of 25 bps rate cut. This clearly shows RBI's concern about the growth performance and outlook and urgency to take measures to revive growth. The real issues, however, are improving monetary policy transmission and reviving the NBFC sector and the policy does not provide any new measures or even perspectives on these areas.
The 35 bps rate cut is a great news, a tad more than our expectation of 25 bps. This shall help faster transmission of rate cuts, as banks already have excess liquidity, and will now be compelled to deploy in good assets, for which rate cuts benefits need to be passed on in the form of cheaper consumption finance loans linked to auto, home loans, personal loans etc. The credit growth is very important for inducing investment cycles to return. With surplus liquidity in hand and repo rate, at 5.4 per cent, standing at almost 110 bps lower from the start of 2019, the transmission of aggressive rate cuts by banks should follow. This would spur credit growth and propel consumer spending, bringing back healthier economic growth.Mustafa Nadeem, CEO, Epic Research:
This is a welcome move and was pretty much expected on the Street, amid global markets witnessing lower interest rate scenarios and dovish policy stands, equities market taking a hit and negative-yielding bonds surging. This is an accommodative stance, we believe, which the RBI did clearly mention in its previous meet. The monsoon is slowly picking up while inflation remains under control. The headroom space was there and RBI is filling it. Markets in the short term may rejoice and see some recovery to upper levels of 11,100-11,200 as far as 10,750 holds. But it is important to note that we are in a secondary trend which is bearish, and the bulls at present have the least a chance of turning the trend quickly.Romesh Tiwari, Head of Research, CapitalAim:
A rate cut of 35 basis points by RBI is along the unexpected line and will certainly help increase liquidity. Increased limits for exposure limit to single NBFCs from lending bank up to 20 per cent will help revive 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 per cent from 7. Overall, RBI’s response is appropriate for the liquidity crisis, but its effectiveness will depend on the transmission of benefits of the lower rates to end-users. I see an immediate positive impact on real estate, two-wheeler and consumer durables companies ahead of the festival season. Hero MotoCorp, TVS Suzuki, DLF, Asian Paints and Godrej Properties among others, will benefit.RBI has done its part, need structural reforms to support growth, says Governor Shaktikanta DasSubscribe to Moneycontrol Pro and gain access to curated markets data, trading recommendations, equity analysis, investment ideas, insights from market gurus and much more. Get Moneycontrol PRO for 1 year at price of 3 months at 289. Use code FREEDOM.