RBI may not cut rates this financial year

#1
RBI has indicated it will look through the base effect of Inflation to understand the momentum of inflation

The Reserve Bank of India (RBI) on Tuesday left key policy rates unchanged but indirectly raised borrowing cost for banks, which means the EMI of your home loan may still go up. What hurt the lenders was the RBI move to reduce the borrowing limit from the overnight facility (called repo) while raising the cap on borrowing for longer terms through the seven-day and 14-day windows, called term repos.

There was mixed reaction to Rajan's first bimonthly money policy.

Dipen Shah, Kotak Securities

RBI maintained status quo in interest rates and CRR, as expected. It expects the CPI inflation to be at about 8% by end of FY15 and the GDP growth rate to be at between 5.5% and 6% in FY15. In the short term, we believe that, the RBI will remain on hold at least till the new government releases the budget.

While RBI has maintained status quo, it has given several reasons which can provide an upward bias to the inflation over the course of the year. Among these are, a possible El Nino effect on food inflation, increase in minimum support prices, changes in administered prices of fuel, fertilisers, etc, and the geopolitical tensions. If some of these factors play out, interest rate reductions will likely be further delayed. Although the policy rates are unlikely to come down in current fiscal, we are hopeful that the need for raising rates wouldn’t arise as well. RBI is also gradually moving towards market determined liquidity rates rather than the LAF rates. Towards this, it has reduced the LAF eligibility further to 25 bps of NDTL from 50 bps and accordingly increased term repos to 75 bps from 50 bps.

Motilal Oswal,CMD,Motilal Oswal Financial Services

RBI left the key policy rates unchanged indicating a more stable course of policy action. RBI clearly sees inflation remaining stubborn at 8% by Jan-15, notwithstanding their anticipated decline in between. Hence RBI has alerted regarding the upside risks to inflation emanating from El Nino impact, MSP and other administered price hike (fuel, fertilizer and power), fiscal policy and geo-political developments. While it has suggested a moderate pickup in growth for FY15 to 5.5%, it noted that lead indicators are yet to suggest signs of upturn.

The real effectiveness of the policy however, is sought to be achieved by a tighter control over liquidity and money supply. Deviating from the norm, RBI omitted any reference of projected growth in money supply and bank aggregates. Instead it has increased the Term Repo limit while curtailing overnight Repo facility. This would raise the cost of money market borrowing for banks. With no specific guidance announced for money supply, RBI has left the amount of open market operations and forex absorption open for conjecture, making liquidity planning difficult for banks and financial institutions.

The silver lining in RBI’s assessment of the economy is unmistaken. It noted that inflation expectation of the households have declined. It has also indicated an upturn in the business and consumer confidence. Expectations are high from the new government in kickstarting the investment cycle and attracting capital flows. The first would help a pickup in growth while the later would moderate the toughened stance of RBI – both significant positive for the markets .

Murthy Nagarajan, Head Fixed Income - Quantum AMC

RBI has kept the repo rate, MSF, CRR unchanged in its April policy. This was as per market expectations. In my view the governor's statement was slightly hawkish, as he stated no further hikes is necessary if the disinflationary process continues.

However, he expect the risk to inflation to be on the upside due to seasonal effect of vegetable prices reversing due to unseasonal rains damaging rabi crops, chance of rainfall being inadequate due to El Nino effect. RBI has indicated it will look through the base effect of Inflation to understand the momentum of inflation.

In my view RBI may not cut rates in the current financial year as it is looking at CPI inflation of 8 % in January 2015 and 6 % in January 2016 as per the recommendation of Urjit Patel committee report.

Lakshmi Iyer, Kotak Mutual Fund

There was no surprise in RBI’s monetary policy with respect to the repo rate. The central banker continues to remain wary of the CPI headline inflation, especially with respect to the vegetable prices, which have declined on the yoy basis in the recent past. The Central banker may be of the view that seasonality could be in play here and therefore further monitoring of inflation for more conclusive proof might be needed before any policy change. Having said that, we believe that the inflation and rate peaks might be behind us; and we may see a slow transition towards a more stable stance in the months ahead.

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

RBI has maintained status quo as per our and consensus expectations, though not clearly spelled out in policy but RBI is incrementally concerned about sticky growth underperformance, RBI has hinted that lead indicators do not point to any sustained revival in industry or services & hence believes that slower activity will help disinflate the economy which will support the fight against inflation. Till these processes evolve RBI feels current policy rates are appropriate and may not require further tightening.

We expect current disinflation process to continue and core inflation to moderate further however sharp fall is unlikely in short-term. Monsoon will be key to watch as it can create short-term volatility in inflation path.

Bond markets should continue to trade in the narrow range in future till the time inflation actually drops; also key events like election outcome and budget will provide further cues. The focus has clearly shifted from external risks to domestic structural issues, and if new government addresses those issues with correct mix of policies and reforms it will provide impetus to growth and also bring inflation down.

Vinod Nair, Geojit BNP Paribas Financial Services

Again Raghuram Rajan could surprise us with a no surprise! We continue to believe that till the election result is clear, index will remain in the sidelines and bulk of the action will be witnessed in mid and small caps. Post the RBI meet we saw some profit booking in banking stocks which we believe is only a near-term phenomenon, Banking should continue to provide healthy support especially PSU banks.

During such a strong momentum instead of predicting the next market move, as a risk averse retail investor it will be wise to take home some gains and wait for consolidation before investing new money. Index is in a new territory without a upper limit, hence predicting new levels would be unwise in a momentum market. Cautious is advised in metals, auto & ancillaries and IT lead by a stronger Rupee.

Varun Goel, Head PMS, Karvy Stock Broking

RBI governor maintained the repo rate at 8% in today’s policy. Despite the recent cool-off in headline inflation numbers, the future trend remains unpredictable. RBI has maintained its target of headline CPI at 8% by January 2015 and 6% by January 2016. We expect RBI to maintain status quo for some time to achieve these objectives as a significant drop in inflation appears unlikely in the short term. Food and vegetable prices seem to have bottomed out and we expect some uptick in those items in the coming months.

GDP growth in the last three quarters has remained below 5%. The slowdown is expected to have continued in fourth quarter also. RBI has pegged FY15 GDP growth estimate 5.5% with downside risks. The expectations of weak monsoons this year might depress agricultural growth while industrial activity stays muted.

The steady narrowing of the trade deficit over the year has shrunk the current account deficit (CAD) to 0.9 per cent of GDP in Q3 of 2013-14. For the year as a whole, the CAD is expected to be about 2.0 per cent of GDP versus 4.8% last year. This puts India into a relatively comfortable position compared to other emerging market peers given the uncertain external environment.

Sachin Sandhir, MD, RICS, South Asia

The Reserve Bank of India’s (RBI) decision to keep the key policy rates unchanged comes on expected lines, as there have been positive indicators in the economy such as the softening of the retail inflation. Driven by food prices, especially vegetables, retail inflation, measured by the consumer price index too dropped to 8.1 per cent in February from the earlier 8.79 per cent in January.

Within the same period, the wholesale price index fell to a nine month low inflation figure to 4.68 per cent from 5.05 per cent in January on account of this softening in prices. RBI Governor, Raghuram Rajan, had earlier said that the extent and direction of further policy steps will be data dependent. And this comes as no surprise that he is taking a cautious stand by monitoring the inflation. The repo rate, the rate at which it lends money to banks, remained at 8 per cent. Other policy instruments such as cash reserve ratio also remain unchanged at 4 per cent.

Softening of prices will have some positive impact on the overall market, including key components such as housing, where property buyers have been under stress due to rising food and fuel prices.

This article taken from Money Guru India : http://www.moneyguruindia.com/article.php?cid=6875&id=17
 

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