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Expert Views: RBI Cuts Repo Rate By 25 Bps, Holds CRR

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The Reserve Bank of India (RBI) central bank cut its policy interest rate by 25 basis points on Friday for the third time since January, as expected, as growth slows and inflation ebbs, but said there is little room to ease monetary policy further.
 
The RBI trimmed the repo rate to 7.25 per cent, its lowest since May 2011, and kept the cash reserve ratio (CRR) for banks unchanged at 4 per cent, also in line with expectations.
 
However, it warned that the risk of inflationary pressure persists despite a recent sharp decline in wholesale price index (WPI) inflation, and said a high current account deficit poses the biggest risk "by far" to the Indian economy.
 
Comments
Robert Prior-Wandesforde, director, Asian Economics Research, Credit Suisse, Singapore
"I think there is a little bit of disappointment because of the lack of a cash reserve ratio cut. The market will take some time to fully digest this statement.
 
"All the way along, Subbarao has been cautious, and that is the message. Today's statement suggests there is room for another 25 basis point reduction in the repo rate.
 
"However, if growth continues to disappoint, inflation is on the downside and the current account deficit improves more than expected, we will get more reductions than effectively suggested in today's statement. I think there could be another 50 basis points cut in the repo rate in 2013."
 
Shubhada Rao, chief economist, YES Bank, Mumbai
"I think it is in conjunction with the hawkish tone yesterday, in terms of the risks that are outlined by the Reserve Bank such as likely resurgence in inflation later. There is reiteration of emphasis on improved governance and addressing of supply bottlenecks, which is essentially in the government's policy domain.
 
"As such the scope for RBI to cut rates further is contingent to some of these steps which may be undertaken by the government. We however believe that inflation is likely to move around comfortable trajectory given the outlook on commodities and given the continued deceleration in growth momentum in the first half. Clearly, the RBI has highlighted very limited space and the inference is utmost another 25 basis points and we are unlikely to see rate cuts beyond that."
 
Radhika Rao, Economist, DBS, Singapore
"Cautious RBI commentary today in addition to yesterday's macroeconomic report which highlighted 'very limited room' to ease rates has overshadowed relief from the 25 bps rate cut. As expected, the CRR was left unchanged, as policymakers seem convinced that bond buybacks and lowering of the government cash balances will be sufficient to thaw liquidity conditions and improve transmission.
 
"In essence, the guidance from the central bank is that the correction in the inflation and current account position is more cyclical rather than structural. Thereby caution should be exercised on both counts and that the central bank is unlikely to embark on an aggressive easing cycle if they are not convinced that the structural constraints have been addressed. Some sacrifice by way of slower growth seems inevitable then."
 
Dariusz Kowalczyk, Senior Economist Ex-Japan Asia, Credit Agricole CIB, Hong Kong
"The RBI's statement language disappointed markets. The central bank said growth rebound likely only from Q4 2013, inflation risks mean 'little space' for more easing, and highlighted risks from current account deficit adding that they may cause a 'swift' policy 'reversal'.
 
"We still see two more cuts this fiscal year and modest upside to the INR as well as G-Sec yields and the INR OIS curve."
 
A. Prasanna, economist, ICICI Securities, Primary Dealership, Mumbai
"I think the RBI is still accommodating, and when they say there is little room to cut, it suggests there is one more cut, maybe not in the next policy review but possibly in July provided inflation continues to come down.
 
"I think the HTM (hold-to-maturity) cut is spaced out, maybe immediately it could be a little negative, but the way it is being implemented, I think the market should be able to absorb it. But with supply pressure in May, there could be some upward pressure in yields."
 
Arvind Chari, Fixed Income Fund Manager, Quantum Asset Management, Mumbai
"It is a very balanced policy but the HTM cut of 50 bps every quarter may be higher than market expectations. Also WPI target at 5 per cent for end-March 2014 would mean that commodity prices would need to remain lower/benign to allow RBI space to cut more."
 
Market Reaction
The 10-year bond yield rose 2 basis points to 7.79 per cent from levels before the decision. The rupee extended losses, weakening to as much as 54.06 to a dollar from 53.98 previously. The BSE Sensex also lost further ground to be down 0.8 per cent.
 
(Reuters)


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