<div>The Reserve Bank of India (RBI) kept its policy rate on hold at 7.25 per cent on Tuesday (04 August), as widely expected, while leaving the door open to ease further depending on the inflation outlook and how swiftly banks lower their lending rates.</div><div> </div><div>The central bank also said government economic reforms and the timing of any increase in US interest rates would be key factors that will determine whether the RBI cuts rates for a fourth time this year.<br><br><strong>Commentary</strong></div><div> </div><div><strong>Chandrajit Banerjee, Director General, CII</strong></div><div>The 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.</div><div> </div><div>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. </div><div> </div><div>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. </div><div> </div><div>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.</div><div> </div><div>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.</div><div> </div><div><strong>Nimesh Shah, MD & CEO, ICICI Prudential AMC</strong></div><div>The RBI left policy rates unchanged as was widely expected leaving the repo rate at 7.25 per cent and the corresponding marginal standing facility (MSF) and reverse repo rate at 8.25 per cent and 6.25 per cent respectively at status quo. The big highlight was RBI revised inflation projection downward by 0.20 per cent for Q1 of 2016, in light of softer commodities & energy prices and monsoon turning out to be close to normal against earlier expectation of deficit of 12 per cent.</div><div> </div><div>While the RBI highlighted the risk of volatility in case of a US rate hike, overall, it seems confident that inflation and growth recovery look more or less on projected lines. Its forward guidance suggests room for further easing in the coming months once the US Fed’s possible action is clearer, food prices trending favourably in near term, Government's measures on the supply side taking place and further transmission of lending rates.</div><div> </div><div>We believe that inflation is likely to come at 5.25 per cent by Q1, 2016, well within the RBI’s projected trajectory of 6 per cent. The current account could be maintained at 0.5—1 per cent of Gross Domestic Product (GDP). With the repo rate at 7.25 per cent and the possibility of further rate cuts, 10-year bond yields at 7.81 per cent are reasonably valued and could come down by 40-50 bps in the next 6-9 months. Long-duration funds appear well-placed in a downward rate cycle. But for those looking to diversify, a debt portfolio with short- and medium-term bond funds could prove to be a good combination.</div><div> </div><div><strong>Jimeet Modi, CEO, SAMCO Securities</strong></div><div>The RBI behaved in line with market expectations maintaining a status quo on the rates. One of the biggest cues for a dovish RBI stance comes from the fact that inflation expectations have been lowered. We believe RBI’s status quo even in a low inflationary environment has largely to do with the non – transmission of previous cuts by the RBI. </div><div> </div><div>We believe that once PSU banks are re-capitalised subsequent to the government infusion, credit off-take will improve which will lead to higher transmission of the past rate cuts. However, this seems to be a couple of quarters away and we don’t expect banks to lower rates in the short term. </div><div> </div><div><strong>Arun Gopalan, Vice President, Research, Systematix Shares & Stocks</strong></div><div>The RBI’s decision to maintain status quo on policy rates was quite in-line with broad expectations. But what was being watched keenly is the stance the central bank takes on the way forward. Though the outlook on inflation seems benign, clearly we are looking at a “wait-and-watch” period. The key factors which the RBI will monitor closely to decide on the future course of action include the inflation trajectory, the progress of the monsoons, the events surrounding the US rate hike and the transmission of the rate cuts by the banks.</div><div> </div><div>Together with the RBI’s stand that it will “look for emerging room for more accommodation” , the lowering of the Jan-Mar inflation forecast by 20 bps may seem benign. But the street witnessed quite a bit of volatility after the policy was tabled. Clearly further rate cuts would become increasingly difficult as we get closer to the US rate event.</div>
