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Expert Views: RBI Cuts Rates By 35 Basis Points, More Than Expected

The RBI maintained its "accommodative" stance but said further rate reductions would depend on the level of inflation.

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The Reserve Bank of India (RBI) cut interest rates by an unconventional 35 basis points on Wednesday, slightly above expectations, and its fourth cut in 2019 to boost an economy growing at its slowest pace in nearly five years.

The RBI maintained its "accommodative" stance but said further rate reductions would depend on the level of inflation.

Commentary

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, Mumbai

"The 35 bp rate cut should be seen as a signal that the Reserve Bank of India's MPC is quite concerned with the growth outlook beyond the usual 25 bp rate cut in a business-as-usual scenario, even though it does not reflect in the revised FY2020 GDP growth estimate." 

"The RBI MPC did not necessarily want to deliver a 50 bp rate cut, and hence, retains the scope to reduce rates further. With inflation expected to remain benign, and further downside to growth outlook, we see scope for 25-50 bp of further rate cuts through FY2020." 

"Transmission to lending rates will likely remain weak unless there is a clear visibility of adequate liquidity sustaining over the medium-term."

Suraj Kaeley, Senior Adviser, Fundsindia 

"There has been a significant slowdown in the Indian economy. It was widely expected that the RBI would cut rates to stimulate growth. Further, global interest rates are going down and there is no immediate threat on the inflation front. We welcome this move and hope that rate transmission happens at a faster pace."

Joseph Thomas, Head Research, Emkay Wealth Management, Mumbai

"The RBI policy, especially the repo rate cut of 35 bp, takes cognizance of the need to bring down 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 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."

Anagha Deodhar, Economist, ICICI Securities, Mumbai

"I think deviation from the standard practice of changing rates by 25 bp is welcome. In the current situation, 25 bp would have been insufficient and 50 bp would have been too aggressive. Growth and inflation are expected to pick up modestly in H2FY20. We expect inflation to cross 4% in November 2019. Hence, we could expect only one more rate cut this fiscal."

"Banks have already started cutting lending rates. However, the lending rate cuts are much smaller than reduction in repo rate, indicating significant room for transmission."

Rupa Rege Nitsure, Chief Economist, L&T Financial Holdings, Mumbai

"The RBI has done the maximum that a central bank can do in the current phase of economic slowdown."

"By significantly revising downwards the GDP growth for H1, FY20, it has signalled the concerns on the growth front. However, the weight of structural factors has increased in India's ongoing slowdown and it is now absolutely essential for the central and state governments to work in partnership to resolve some of the sticky sector-specific issues and concerns."

Shubhada Rao, Chief Economist, Yes Bank, Mumbai

"Welcome the 35 bp rate cut. Growth is likely to be revised down further from 6.9%. Given the well-anchored inflation, we believe that the RBI is set to cut rates in the next policy review in October. It could be 15/20 bps also. It is clear that reviving growth has received most attention."

Sujan Hajra, Chief Economist, Anand Rathi Securities, Mumbai

"The 35 bp rate cut is higher than the consensus and our expectation of a 25 bp rate cut. This clearly shows the RBI's concern about growth performance and outlook, and the urgency to take measures to revive growth." 

Dhaval Kapadia, Director – Portfolio Specialist, Morningstar India

"RBI reduces policy rate by 35bps to 5.40%. Four members voted in favour of a 35bps cur and two voted for 25bos cut.

RBI maintained its CPI forecasts but reduced their growth forecast for FY19-20 by 10bps to 6.9%. They expect a fairly strong recovery in the second half of the fiscal although current economic are mixed and point towards a slowdown.

Surprisingly, there is no mention of concerns around fiscal deficit and its potential impact on inflation, particularly in an environment of slowing growth which could result in lower tax revenues for the government vs budgeted.

Broadly the focus is to improve growth with lower interest rates and adequate liquidity support.

Also no mention on the NBFC sector crisis, in the policy document."

Gaurav Chopra, Founder & CEO, IndiaLends

''RBI went for a larger-than-expected interest rate cut of 35 basis point for the first time since Apr-12 taking the repo rate to a nearly a nine-year low at 5.40%. This move comes at a time when global economic activity has slowed down and geo-political uncertainty have become two of the major concerns for the nation. This is a welcome move as it will give a boost to the economy and retail lending sector. The success of this move will depend largely on Banks & NBFCs’ decision to pass on the rate cut to end consumers thereby making loans cheaper for them. RBI's decision to reduce the risk weight for personal loans to 100% from 125% will further boost retail lending as this move will allow banks to reduce their interest rates for Personal Loans. At the backdrop of such favouring policy changes and with festive and wedding season about to start, we expect a rise in retail lending.''

''Other developmental measures announced such as increasing credit flow to the priority sector – permitting banks to on-lend through NBFCs to Agriculture, Micro & Small Enterprises and housing, will provide a positive push to overall lending in the market and will help boost economic growth. Other notable issues that the bi-monthly policy addresses are, facilitating the creation of a Central Payment Fraud Registry that will track frauds and the round-the-clock availability of NEFT System''.

Rajiv Sabharwal, MD and CEO, Tata Capital 

“RBI reduced the repo rate by 35 bps and continues to maintain an accommodative stance. The markets will draw comfort from the fact that the regulator has emphasised on boosting growth and private investment remains high priority at this juncture. Supplemented by durable liquidity and an effective transmission of rates, the bond market will continue to sustain momentum. Priority sectors are the engines for the growth of the economy and NBFCs play an important role in delivering credit to these sectors. Thus permitting the banks to on-lend through NBFCs for Agriculture and MSMEs will help further channelize the credit flow effectively to these sectors.”

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

“The RBI MPC today departed from the conventional rate action of 25 bps and its multiples and announced a 35 bps cut in repos rate. The accommodation in stance continues. The sluggish global economy, the fact that world over central bankers are easing rates, and of course our economy also faces growth headwinds were among the key reasons that can be attributed to the rate cut. There seems to be a fervour to maintain comfortable liquidity in the banking system, which should be an additional support factor for bond yields, apart from cut in benchmark rates.

Going forward, the quantum and timing of rate actions (read cut as we are in accommodative stance) would be largely data dependent. With today’s rate action, we have seen a cumulative rate reduction of 110 bps, and it is imperative to see this impact percolate to the real sector.”

Mani Rangarajan, Group Chief Operating Officer, Housing.com- Proptiger.com- Makaan.com- Fastfox. 

“While the industry largely expected a rate cut of 25 bps, the RBI reduced its repo rate by 35 bps to 5.4%, making this its fourth consecutive rate cut since February 2019. This cumulative 110 bps rate cut in the last four policy reviews, comes at a strategic timing since the sector is waiting for the festive season to hopefully boost sales and sentiment. How far these rate cuts will succeed in spurring consumption, is something only time will tell. However there's no denying that in the mid-income and affordable housing segments which are very price sensitive, these rate cuts, can boost sentiment and sales, provided they are passed on to the end-users by the banks. We are hopeful of the same as the RBI has been nudging banks to reduce their interest rates and certain banks have started passing on the rate cut benefits to their new and existing customers. We also believe that the limit for priority sector lending for housing, which has been enhanced from Rs 10 lakhs to Rs 20 lakhs, will bode well for the affordable housing segment.” 

Ashish Sarin, CEO, AlphaCorp 

"We welcome the RBI’s decision to reduce the repo rate for the fourth consecutive time since February by another 35 basis points to 5.4 percent. It is a step in the right direction to give impetus to the investments in the country. The real estate sector is highly sensitive to interest rate movements, and hence this reduction would prove to be a great boost to the homebuyers. This move will also help improve the overall sentiment around the current economic scenario in the country." 

Pankaj Bansal, Director, M3M Group 

"A cut in the repo rate by 35% basis points to 5.4% is a positive move by the RBI considering the present slowdown in the economy. It will also allow banks to lower interest rates which would encourage prospective buyers both end-users and investors to invest in real estate. This will support various industries including real estate that seek customer loan for end-users, which in turn will provide the much-needed boost to the economy and also positively impact the sentiments surrounding the real estate. Overall, this move definitely indicates a positive direction and fuels the growth and development of the real estate sector, as its performance is directly linked to the basic economic fundamentals."

Dr. Ranjan Chakravarty, Product Strategy, MSE 

"Following up from the Governor's message delivered to the World in Washington earlier this year, of calibrating rate cuts to India's needs instead of needlessly sticking to global convention, the MPC has delivered a properly calibrated rate cut. A 35 bp cut is exactly appropriate. 25 would have been too soft and 50 wasteful given the strong performance of the monsoon since the previous policy announcement. The market will definitely appreciate this." 

Ramesh Nair, CEO & Country Head, JLL India 

"In line with the general market sentiment, the cumulative 110 bps rate cut in the last four p olicy reviews favours the Indian economy. The rate cut of 35 bps delivered by the RBI is likely to bring in a balance between growth and inflation. Riding along the same track, the real estate sector too will gain momentum owing to favorable policy reforms. However, the growth shall also depend on whether there is a proportional transmission of rate cuts to the end consumer.

The rate cut has a direct bearing on the real estate sector considering that residential sales rely to a large extent on the availability of credit in the form of home loans and buyer sentiment. The improved market sentiments due to the tax deduction schemes, modified tenancy laws, focus on implementation of PMAY, investment in infrastructure announced in the Union Budget 2019-20 coupled with interest rate deductions is likely to boost sales in the residential segment. Moreover, credit re-structuring measures such as the introduction of repo-linked loans by select banks will positively impact the homebuyers’ purchase decisions while ensuring enhanced transparency.

The decision to cut down rates was expected owing to the ongoing liquidity crisis and muted economic growth. This said, the RBI has taken the cue from the government’s Union Budget 2019-20, where it gave elbow room for fiscal stimulus to NBFCs. Additionally, the global slowdown followed by the US Fed lowering its rate provided yet another indication to the Central Bank.

The real estate sector has already registered a 22% Y-o-Y growth in sales in the first six months of 2019 as compared to the corresponding period of last year. Stable real estate prices combined with steadily rising incomes have further uplifted the homebuyers’ sentiments in the last few quarters. However, the growth trajectory of the real estate sector ultimately depends on the successive transmission of rate cuts to the end consumers.''

Ravindra Sudhalkar, ED & CEO, Reliance Home Finance

 “The Reserve Bank of India’s decision to cut rates by 35 basis point is a positive decision. The move to allow banks to lend to priority sectors, including to housing sector of up to Rs 20 lakh loans, through NBFC arms will kickstart credit flow especially to affordable housing sector. For the consumers to feel the benefit of lower rates, the RBI will now need to step in for accelerating transmission of the rate cut.” 

Puneet Maheshwari, Director, Upstox 

"RBI’s decision of a 35 basis point rate cut is a welcome move. However, it is a surprising number because this is a departure from the norm of sticking to multiples of 25 for any rate revision. The markets did not immediately react, probably because the fundamentals for the economy still continue to be weak. The prediction of GDP growth accelerating to 7.4% by Q1 of the next financial year while the inflation figures remaining contained under 4% is a good news for long term investors.” 

Narinder Wadhwa, President, Commodity Participants Association of India (CPAI) 

“The Reserve Bank of India’s decision of a cumulative rate cut for the fourth time in a row was to ease the situation of liquidity tightening in the system.  The regulator has retained its accommodative stance, which indicates its willingness to remain flexible till the economic conditions improve. The uptick in gold prices with the rate cut announcement indicates the investors confidence in this traditional asset during uncertainties. The easing of liquidity situation and accelerating transmission of the rate cut to the end consumer will boost investment sentiments in commodities ahead of the festival season.”   

Siddhartha Mohanty, MD & CEO, LIC Housing Finance 

"It is a welcome move by RBI in cutting repo rate by 35 bps that will rejuvenate and set growth triggers in the economy. Continuing “accommodative” stance will improve sentiments in the system. Increase in single-NBFC exposure limit to 20% of the Tier 1 capital of the banks would address the pressing liquidity issues. Further, RBI has also announced an increase in the on-lending cap for priority sector advances for home loans from Rs 10 lacs loan ticket to Rs 20 lac loan ticket. This will encourage Banks to lend more to the HFCs It is a big positive for HFCs focussing on affordable housing segment." 



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