The Reserve Bank of India (RBI), in yet another surprise move, slashed its policy rate by 25 bps to 7.5 per cent. This is the second time that the central bank has unexpectedly slashed rates this year. RBI governor Raghuram Rajan noted that the need to act outside the policy review cycle is prompted by two factors. First, the still weak state of certain sectors of the economy as well as the global trend towards easing suggest that any policy action should be anticipatory once sufficient data support the policy stance. Second, with the release of the agreement on the monetary policy framework, it is appropriate for RBI to offer guidance on how it will implement the mandate.
RBI held its policy rate in the last meeting citing further data from the government on fiscal consolidation and on inflation trajectory for the country. Since then inflation has remained muted marginally increasing to 5.11 per cent for January and the government has not hovered from the path of fiscal consolidation. The Finance Minister Arun Jaitley assured the markets in his first full term budget that the government would be able to achieve the target of 4.1 per cent in the current fiscal.
The decision by RBI has been welcomed from analysts and economists across the spectrum given that expectations of Fed raising rates have tapered and cheaper credit would be necessary for economy to achieve the double-digit growth target. "We welcome the repo rate cut by RBI. With the government embarking on a path of qualitative fiscal consolidation and the formal adoption of inflation targeting, inflation trajectory is expected to stay benign and will aid banks in their decision making,” said Arundhati Bhattacharya, chairman, SBI.
Rendering this as good news for the economy Jayant Manglik, president-retail distribution, Religare Securities, said, "This rate cut may make Indian debt less attractive to FPIs but since the budget’s FPI MAT provisions are in favour of FIIs taking the equity route, this may not matter as much. Interestingly this strategy currently works well in the global scenario as well. The US Fed has indicated that it may not raise rates immediately and our lower rates will discourage fund flows from EU which has negative interest rates, which means no hot money outflow or inflow is expected."
"The speed at which these decisions are being taken augurs well for the Indian economy," he added.
The decision of rate cut not only favoured the government which while announcing the budget laid great emphasis on need of cheaper credit, it brought some cheer to the markets. "This rate cut comes as the very strong trigger for the market as this was the second repo rate cut after January and second rate cut for the year FY 14-15. After a rate cut announcement, Sensex crossed the 30,000 mark in intra-day trade while Bank Nifty, the banking share index, was up in green in early trade and touched a record high of 9191. Reality stocks also zoomed on the hope that this action will drag interest rate down and will help in reducing interest burden on outstanding loans," said Rohit Gadia, founder and CEO, CapitalVia Global Research.
Further rate cuts expected
Market players expect RBI to support the economy with further cuts as inflation is expected to remain well within the target. But the governor pointed out there are still some significant risks as international commodity prices are expected to remain benign, given still-sluggish global demand conditions. The possible spill over of volatility from international financial markets through exchange rate and asset prices channels is also a risk.
"The rate cut announced in January had not translated into action by the banks, but a cumulative cut now amounting to 0.5 per cent will enhance lending powers of the banks. It will permit banks to cut down interest rates on home loans enabling new consumers to take advantage of the low interest rates in the real estate market. We are, however, hopeful that given the positive sentiment of the Budget and the economy a further cut in rates to be announced later this year," said Brotin Banerjee, MD and CEO, Tata Housing.
Naresh Takkar, CEO of ICRA group, termed the cut as a positive surprise while emphasising that the agreement on monetary policy framework between RBI and the government would help anchor inflationary expectations.
"If the monsoon is normal and crude oil prices do not stage a sharp rebound, we expect further easing of 25-50 bps in 2015. The speedy transmission of rate cuts would complement the measures taken in the Budget to spur investment activity and enhance infrastructure financing," he said.
Madan Sabnavis, chief economist at CARE ratings, reiterated the government view of 8-8.5 per cent growth in FY16 and emphasised that there might be another 25 bps rate cut in April.
"RBI would look at reducing interest rates by 50-75 bps in total by December 2015 depending on the monsoon and the inflation movement. Going forward, as the repo rate moves towards 7 to 6.75 per cent, the G Sec yields are expected to be 10-20 bps above the repo rate." he added.
On the other hand, Radhika Rao, economist at DBS, said, "The rate cutting cycle has more room to run and we retain another 25bps cut call by the June quarter.”
With the RBI policy to be altered according to the new monetary policy framework, the policy is expected to work in sync with the government's agenda. "Since the monetary policy framework now has the government’s buy-in, there’s possibly also expectations that supply-side constraints will be addressed in a hastened manner, giving RBI the confidence on price stability," she added.
Gagan Banga, vice chairman & MD, Indiabulls Housing Finance, reiterated this stance emphasising on better prospects for the economy. "A synchronised action plan between the government and RBI may result in the upcoming growth cycle to be longer than the normal 18-24 economic cycle which India normally goes through," he said.
(Edited by Joby Puthuparampil Johnson)