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Reactions flow in on RBI Monetary Policy

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The following are reactions from industry experts and analysts on RBI’s monetary policy announced today.

The central bank did not change key interest rates, which was in line with what the Street had expected.

Repo rate remains unchanged at 7.25% and CRR remains unchanged at 4%.

Kunal Shah, Fund Manager, Debt at Kotak Mahindra Old Mutual Life Insurance Ltd

RBI has maintained a status quo on rates. Given the frontloading of cut in June policy, RBI will monitor transmissions by banks in terms of lower lending rates, full monsoon performance by September & external events like commodity prices and Federal Reserve rate policy. We believe if monsoon performance is satisfactory and if global commodity prices remain benign, it will open space for more easing. RBI has highlighted that non-food inflation uptick is worrisome and needs to be monitored carefully.

For bond markets, policy guidance is less dovish than expected also more easing of rates are contingent on various factors. Hence, in near term 10y yields can remain in a range of 7.75-7.85%. Markets will keep a close watch on rains and oil prices. We believe lower growth & lower commodity prices can provide further room for 25-50bps cuts in near to medium term, which will pull down 10y Gsec yields towards 7.50%.

Ankit Ladhani, Karvy Stock Broking

In line with expectations, RBI maintained reduced status quo during the 3rd bi- monthly policy for FY2016. RBI continues to maintain that the same is front loaded and has pointed out a number of issues currently existing in the economy- from impact of unseasonal rains to slower growth in global growth. RBI has also hinted that GoI should push for passing of the land acquisition bill along with sorting out the issues in power sector. We believe that banks are unlikely to pass on the interest rate cuts to a larger extent as they are already reeling under high credit costs due to rising fresh slippage as well as slippages from restructured books. We do not expect any further rate cuts in the near future.

Dinesh Thakkar Chairman & Managing Director, Angel Broking

“The status quo maintained by the RBI in terms of key policy rates was on expected lines. The RBI has however stated that it would continue to maintain accommodative policy stance in the coming months on expectations of moderation in inflation. The RBI reduced its inflation forecast for Q4FY2016 downwards by 0.2%.

The cumulative monsoon rainfall so far has been near normal. Also higher reservoir positions bode well for the Kharif sowing which has increased by 8.7% compared to the year ago period. These developments along with the contingency food management by the government are expected to check any shock to food inflation due to adverse weather conditions. In addition, the low increase in MSP and rural wages, modest global commodity as well as crude oil prices and still weak domestic demand conditions are expected to check inflationary pressures in the coming months. In our view, the CPI would remain modest at 5.5% in the last quarter of FY16. With the CPI falling within the RBI’s target range, we believe that there could be around 50 bps reduction in the policy rates in the second half of the current fiscal.”

Chandrajit Banerjee, Director General, CII

RBI’s decision to maintain the status quo on policy rates indicates a guarded approach towards monetary easing to restrain inflationary expectations and is in alignment with market expectations.

CII is of the view that the policy of frontloading the interest rate cuts should have been allowed to continue as this would have sent a strong signal that the RBI aggressively addressing the growth risks in the economy accruing from weak demand conditions which are holding back investments.

No doubt, CII appreciates the RBI’s concerns about the anticipated pipeline risks arising from inflationary expectations and unfavourable external developments as cited in the policy statement. However, crude oil prices have been on a downtrend thereby allaying fears of imported inflation, the timing of the proposed Federal reserve actions, which is anticipated to unsettle our financial market, is still unclear and the government’s food policy management has beneficially impacted inflationary expectations which is reflected in our subdued headline inflation print.

At the same time, credit demand is weak and corporates and banks are grappling with a large number of stressed assets, particularly in the infrastructure sector. A cut in interest rate in such a situation would have done much to restore the investment cycle.

Going forward, CII expects that the spotlight would be shifted towards growth and RBI would resume monetary easing in its next monetary policy when there would hopefully be much more clarity about the inflation trajectory, the normalcy of monsoons and the possible Federal Reserve actions.

Bekxy Kuriakose, Head – Fixed Income, Principal Pnb Asset management Co

RBI kept key rates unchanged as expected. The tone of the monetary policy stance continues to remain cautious as against expectations of dovish stance. In particular RBI has expressed concern on rise in core inflation and inflation expectations of households. Market reaction post policy was negative and gilt prices fell from pre policy levels. Going forward food inflation and Fed Reserve action would be key determinants of policy action. If these factors remain benign we could see further rate cuts.

Rana Kapoor, President of the Associated Chambers of Commerce and Industry of India

As the policy paper itself has highlighted, the Monsoon has progressed well and khariff sowing of several key crops like oilseeds, rice, pulses and coarse cereals has picked up quite well. Going forward, the food inflation, along with fuel, should further come down. In so far as the impact of Fed Reserve’s action is concerned, even if the US rates rise, it has already been discounted, said Mr. Kapoor.

While RBI has read it well that the growth is picking up, it has conceded that the capacity utilisation remains quite subdued…This is because of lack of consumer demand, which needs to be pushed up by lesser costs of funds.

India Inc would like RBI to take full advantage of the cheap commodity prices, including of the fuel and go in for some bold moves in interest rates…that would have helped both ways- in reviving the consumer demand and de-leveraging the balance sheets.

Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mutual Fund

While the policy event was a status quo, the tone and tenor indicates that central banker is looking to build a sustainable and accommodative monetary policy environment. RBI’s insistence that banks transmit the earlier rate cuts; and its willingness to allow positive liquidity in the system, implies that central banker is seeking to increase competition amongst banks. This would likely bring down the broad interest rate within the economy. The policy course is now driven by data inputs about the progress of monsoon, the agri-supply situation and the likely impact of the US Fed rate hike. On balance, we perceive the RBI’s rate cutting cycle has some more distance to run – not a sprint, more likely a marathon.

Nirakar Pradhan, Chief Investment Officer, Future Generali Life Insurance

“After front loading monetary policy actions with reduction in policy rates by 75 bps during the current calendar year, the Reserve Bank of India maintained status quo on repo rate at 7.25% in its meeting today.

However, it indicated that an accommodative policy stance would continue if conditions like transmission by banks, stable food inflation, addressing supply side issues and signs of normalisation after US Fed action are met. Banks have already started transmitting a rate cut. This might accelerate further as credit growth picks up. At the same time, the Government has been proactive in taking policy steps to kick start public and private investment. Assuming monsoon pans out well during August and crude & commodity prices continue to be soft, we expect a 4th cut of 25 bps in repo rate during the current calendar year.

Both equity and debt markets should take the policy announcements positively.”

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