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Industry Reactions To RBI’s Monetary Policy

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The Reserve Bank of India (RBI) kept its key policy repo rate unchanged on Tuesday (5 August) as widely expected, but warned about inflationary risks should a shortfall in monsoon rains spark a surge in food prices.

Read how industry reacts on the RBI's monetary policy:

Shashwat Sharma, Partner, KPMG in India
As expected RBI has followed a cautionary approach due to tensions at Russian border and Middle East ( Iraq and Libya), and domestic inflation is still at risk.

Following earlier monetary policy, SLR has been reduced by 50 bps thereby releasing Rs 30000 crores into the system which largely will go to support the manufacturing sector going by last quarter improvement in that sector.

RBI will monitor the reduction in fiscal deficit to ease the interest rates.

Rahul Goswami, Chief Investment Officer– Fixed Income, ICICI Prudential AMC
The 3rd bi-monthly monetary policy by RBI, more on expected lines has been neutral and balanced, whereby, the central bank has kept the policy rates unchanged; However, to enhance the credit availability to productive sectors of the economy, RBI has increased flexibility for banks by reducing the statutory liquidity ratio (SLR) of scheduled commercial banks by 50 basis points from 22.5% to 22.0% of their NDTL.

RBI has acknowledged the moderation in retail inflation, indicating that broad based moderation is accompanied by deceleration in the momentum as well. We expect the CPI inflation coming much lower than RBI’s expectation of 8%, panning out closer to 7.5% by Jan 2015. On the growth projections, we continue to believe that there is high probability of GDP close to 5.50%, with somewhat downside risk because of lower monsoon impacting agricultural production.

Our medium term expectation on moderation of interest rates continue to be strong, and this comes from the view that CAD will remain moderated at less than 2% of GDP and CPI inflation coming below RBI target of 6% by Jan'2016, thereby we continue to be believe that long-term duration funds are good investments to buy for an investment horizon of medium to long term.

Anuj Puri, Chairman & Country Head, JLL India
The monetary policy announced today indicates that the RBI is of keeping a close eye on inflation rather than facilitating growth just as yet. This makes sense. Globally, emerging markets (including India) continue to remain vulnerable from decisions by US Federal government on withdrawal of stimulus, as well as geopolitical tension in the Middle East – which could impact crude oil prices.

In India, leading indicators such as the monthly Industrial Production and Purchasing Managers’ Index (PMI) have provided early signals of strengthening corporate sales and business flows. The benign outlook on global non-oil commodity prices and still-subdued corporate pricing power should all support continued disinflation, as should the recent government measures to improve food management.

However, the RBI has deemed it premature to conclude that future food inflation and its effects on broader inflation can be discounted. Also, the government is currently constrained by high deficit and its ability to spend is therefore restricted.

This actually opens up space for banks to increase lending to the private sector. Thus, there is a need to increase liquidity with banks in order to enable them to meet the additional financing requirements.

Kuntal Sur, Partner, Financial Risk Management, KPMG in India
The bi-monthly monetary policy comes in-line with market's expectations as most analysts expected the central bank to hold the ley rates due to the weak monsoon and geopolitical tensions that pressurize global crude oil prices. The repo rate and cash reserve ratio (CRR) remain at 8 per cent and 4 per cent respectively.

Interestingly, statutory liquidity ratio (SLR) for bank reduced to 22.0 per cent of their NDTL. Given the government’s fiscal consolidation road map, it means more money/ liquidity for corporate sector, which is looking to turn around. There has been a cut of HTM ceiling to 24%, which implies banks have reduced margin to keep securities under HTM bucket, as result, they have to value the securities at regular intervals and take a hit (MtM) if there are any adverse movement in valuations. Overall, the policy continues government’s stance on targeting inflation rate to a comfort level and then gradually easing the interest rate.

Vidya Bala, Head  -  Mutual Funds Research, for your information.
The RBI decided to go on a pause mode on interest rates in its third bi-monthly monetary policy review.  When viewed against the seemingly dovish phrases in the last policy statement, the current statement suggests that the RBI may not be in a hurry to cut rates to spur growth. Its focus, instead, remains with reaching the inflation-gliding path target of 6% by January 2016.

While Repo rates and CRR remained unchanged, the RBI chose to cut the statutory liquidity ratio (SLR) by 50 basis points to 22 per cent. The proportion of SLR securities that are allowed to be held-to- maturity by banks have also been brought down by 50 basis points to 24 per cent of a bank’s net demand and time liabilities (NDTL).

What The Policy Stance Means
The SLR cut may be viewed as a means to prepare the grounds for the government’s fiscal consolidation targets and also allow banks to manage their balance sheet and their liquidity coverage ratios. We do not therefore see the SLR cut translate into any meaningful rate cuts by banks.

Also, we have not thus far seen banks increase their lending to industries as a result of SLR cuts. As of May 2014, credit deployment by banks to industries was 12.8 per cent year on year, lower than the 15.3 Per cent seen a year ago. This suggests that while the SLR cuts provide room for banks to lend, banks would wait for deployment than act immediately.

The RBI’s cautious statements on the need to achieve the inflation target and its mention of pick up in industry demand (indicated by production activity) suggests that the RBI may not be in a hurry to cut rates even if it sees a dip in consumer inflation or a couple of months.

In other words, it now appears that the economy is not necessarily waiting for rate cuts to happen in order to grow. In fact, revival in demand sans any rate cut, could mean that any hurried rate cut could even spur inflation. The RBI, therefore, is clearly treading with caution.

Bond markets And Impact For Investors
The bond markets remained somewhat nervous post release of the policy statement. The 8.4 per cent 2024 G-Sec yields rose 0.78 per cent, perhaps sensing some hawkish tones. That said, rates are likely to remain in a range of 20-30 basis points from the current 8.55 per cent.

The reduction in HTM was also not viewed too kindly by stock markets as banking stocks fell. Lower HTM would expose banks’ investments to the price vagaries (as they have to be marked to market).

For investors in debt funds, no change in their strategy towards their investments would be required at this juncture. It is noteworthy that yields of short-term medium term maturity instruments have already come off from a year ago. This has resulted in double digit gains in quite a few short-term debt funds as well as income funds over a 1-year period. A hold strategy would be ideal on these funds, if an investor’s requirement for funds is more than a year away.