<p>The Reserve Bank of India (RBI) cut its key repo rate by a bigger-than-expected 50 basis points to 6.75 per cent on Tuesday (29 September), with inflation running at record lows and the economy in danger of slowing down.<br><br>A <em>Reuters </em>poll last week showed only one out of 51 economists had expected a 50 basis points rate cut, while 45 had expected a 25 bps cut.<br><br><strong>Commentary</strong><br> </p><div><strong><em>Chandrajit Banerjee, Director General, CII</em></strong></div><div> </div><div>CII appreciates the RBI decision to reduce interest rates by 50 basis points in today’s policy. Industry is happy that the RBI has finally recognised the weakness in underlying economic activity and the need for a reduction in borrowing rates to drive a recovery. "Exports from the country have been falling sharply, resulting in low capacity utilisation across sectors. In this scenario, investments cannot be expected to pick up without a significant reduction in interest rates", said Mr Chandrajit Banerjee, Director General, CII.</div><div> </div><div>In this context, CII is pleased that the RBI governor has front-loaded the policy action and has stated that the focus in the near-term will be to ensure that banks are able to pass on the reduction in interest rates. Today’s action by the RBI has removed considerable uncertainty with regard to the direction of borrowing costs faced by industry. The corporate sector will now be in a better position to drive a recovery in investment and growth.<br> </div><div> </div><div><strong><em>Jyoti Vaswani, Chief Investment Officer, Future Generali Life Insurance</em></strong></div><div> </div><div>“Repo rate cut of 50 bps by RBI is a positive surprise. On the back of a slowing private investment, RBI has delivered what industry wanted with an aggressive rate cut. Also, more importantly RBI will continue its accommodative stance and work with Government towards transmission of bulk of the 125 bps cut which augurs well for revival of capex cycle. The increase in the FPI limit for investment in central govt. securities and introduction of a separate limit for SDLs would go a long way in ensuring increased FII participation in the Indian Debt markets. It also indicates RBI’s comfort with the improving macro-economic scenario in India.</div><div> </div><div>Today’s policy actions should be accepted positively by both equity and debt markets.”</div><p><br><strong><em>Sunil Sinha, Principal Economist, India Ratings and Research</em></strong></p><div> </div><div>“The rate cut by the RBI is on expected lines. RBI action is based on its belief that (i) despite CPI inflation rising over the next few months due to the reversal of base effect, it will remain well within its comfort zone, (ii) despite less than normal monsoon rainfall, risk from food inflation appears to be contained. However, the tepid global demand, soft commodity prices coupled with postponement of policy normalisation by the Fed provided RBI additional head room, and in stead of 25 bp cut it went for 50bp rate cut. Today's action by RBI shows that if conditions permit RBI's policy stance will continue to be accommodative”. </div><div> </div><div><strong><em>Chandra Shekhar Gosh, Founder and MD, Bandhan Bank </em></strong><br> </div><div>“The Reserve Bank of India governor Dr Raghuram Rajan has surprised the market by announcing a 50 basis points cut in the repo rate to 6.75%. We could not have asked for more. He has frontloaded the rate cut and committed to continue with an accommodative monetary policy. This will certainly work as a booster dose for economic growth.</div><div> </div><div>In his press conference, after unveiling the policy, the governor spoke about discussing with the government the small savings rates. If indeed the government decides to cut the small savings rates, the banks will be in a better position to cut deposit rates and that will lead to faster transmission of the monetary policy. In other words, the banks will be able to cut the loan rates faster.</div><div> </div><div>With this, we have 125 basis points rate cut since January. Following this, we will see lower loan rate, higher credit growth and, of course, higher growth in gross domestic product”.</div><div> </div><div> </div><div><strong><em>Kumar Saurabh Singh, Partner, Khaitan & Co</em></strong></div><div> </div><div>“With the inflationary forces appearing to be in check, the proposed repo rate cut is a timely move by RBI which has the potential to boost investments and propel growth in India amidst a slowing global economy. The macro-economic conditions of the last few quarters presented the RBI with this opportunity to harmonise its inflation centric approach to the growth centric policy focus of Central Government. It is now up to the banks to pass on the benefit of the rate cut to the consumers and the Central government along with RBI should work with the banks to remove any impediments which may be coming in the way of passing on the benefit of rate cut to end consumers.</div><div> </div><div>Besides this, the proposed changes in FPI investment regime and the issuance of rupee denominated bonds through the ECB route would also be welcomed by corporate India looking to deleverage and cut down its cost of borrowing.” </div><div> </div><div> </div><div><strong><em>Kishor Pate, CMD - Amit Enterprises Housing Ltd</em></strong></div><div> </div><div>"RBI's big repo rate cut is encouraging, but definitely not a game-changer as yet. The cut in repo rate is magnanimous and bigger than expected, and surely make a difference in sentiment. However, there is invariably a lag between the directives given by the RBI with regards to lowering lending rates, and banks complying with these directives. Reduced lending rates are critical at this point, and the rate of loan purchases via home loans must pick up significantly to bring about a revival in the real estate market. This is especially true for cost-sensitive markets like Pune. The leading nationalized banks must proactively take up the initiative of aligning their lending rates to affordability, so that other banks will respond to the need to stay competitive and follow suit." </div><div> </div><div><strong><em>Arvind Jain, Managing Director - Pride Group</em></strong></div><div> </div><div>"The latest revision in the REPO rate is generous and will certainly boost the sentiments surrounding the real estate market. If they follow the signals that the RBI has sent out, they will be able to offer loans at more attractive rates. Cheaper loans for home buyers will prompt a renewed interest in home purchase. Given that the RBI governor also intends to support affordable housing with less stringnent lending norms, the cost of funding for real estate developers active in this segment will also reduce. Real estate developers are definitely in need of a positive change in the lending environment, since they have been battling massively increased development costs and have simultaneously been trying to keep property pricing within affordability."<br><br> </div><div><strong><em>Sunil Kanoria, Vice-Chairman, Srei Infrastructure Finance Limited</em></strong></div><div> </div><div>"With CPI and WPI numbers very much within comfort zone and industrial growth not picking up, RBI's 50 bps cut in policy rate is a decisive pro-growth move and is welcomed. There is still an air of uncertainty on both external and domestic fronts. The timing of a Fed rate hike and how global economy will react to it, still remain unknown. How the monsoons will influence India's inflation levels, will be realized only with a lag. Hopefully, this is the beginning of a series of rate cuts by RBI. However, rate cuts by RBI need to be supplemented by administrative reforms by the government to restart the growth cycle."</div><div><br> </div><div><strong><em>Anuj Puri, Chairman & Country Head, JLL India</em></strong></div><div> </div><div>"As opposed to the market’s expectation of a 25 basis points cut, the RBI has delivered an astounding 50 basis points reduction. With this, it has clearly abandoned its cautious baby-steps approach and assumed a bolder stance, obviously because the current economic fundamentals provide it with the room to do so. Given the magnitude of this step, I do not think any further rate cuts are likely in this financial year, especially since the RBI foresees a moderate growth in inflation rate in the interim months. For the affordable housing sector, the outlook is nevertheless bright, since the RBI governor has made provisions for lending to this sector to become less stringent and broader in scope."<br><br> </div><div><strong><em>Brotin Banerjee, CEO and MD, Tata Housing Development Company </em></strong><br> </div><div>"With festive season around the corner, this was the perfect time for the RBI Governor to announce the rate cut of this magnitude. The cumulative cut of 125 basis points since January this year will give a very good push in improving both the consumer sentiment and the real estate. Cheaper low value housing loans will also help in augmenting the affordable housing segment. However, it is important that the banks translate the rate cuts into lower lending rates so that consumers can leverage the true benefits of the announcement."<br><br><br><strong><em>Vineet Relia, Managing Director of SARE Homes</em></strong></div><div> </div><div>"The RBI rate cut of 50 basis points is a favourable move that would positively impact the buyer and developer sentiment. Real estate is a rate-sensitive sector and the lowering of the repo rate is likely to open up the market for easier housing finance options. We are hopeful financial institutions would follow suit and pass on the benefits immediately to the customer. A reduction indicates a downward trend for rates reassuring buyers about reduced EMIs that is likely to make properties more affordable. This augurs well for the Indian customer considering the upcoming festive season."</div><p> </p><div><strong><em>Vidya Bala, Head of Mutual Funds Research at FundsIndia.com </em></strong></div><div> </div><div>"RBI beats expectations with a 50 basis-point rate cut: The RBI made a surprise repo rate cut of 50 basis points through its September 29 Monetary Policy Statement, taking the repo rate to 6.75%. While the reaction in the stock market seemed a bit sedate, initially, bonds yields reacted positively, falling 0.14 to 7.58% (10-year 7.72% gilt) soon after the announcement.</div><div> </div><div>Call it a festival season bonus or that Santa Claus is in town early (as the media said), the RBI governor’s response was “My name is Raghuram Rajan. And I do what I do”. And he did what he usually does – surprising the markets yet another time; as the rate cut was higher than analyst consensus estimate of 25 basis points."<br> </div><p><strong><em>Rupa Rege Nitsure, Chief Economist, L&T Finance Holdings, Mumbai</em></strong><br><br>"A higher than expected easing is certainly bond positive. How, it gets transmitted to the real sector via credit markets remains a concern given the huge pile of stressed assets in the banking system. The use of the term front loading clearly signals that there is going to be a long pause after today's move."<br><br><strong><em>Navneet Munot, Chief Investment Officer, SBI Funds Management, Mumbai</em></strong><br><br>"A cut of this magnitude was warranted and this will have positive ramifications on growth and markets. We should test 7.50 percent on 10-year yield with potential to go even lower. The linkage of real rates to 1-year treasury bill opens up room for further rate cuts."<br><br><strong><em>Atsi Sheth, Associate Managing Director, Sovereign Risk Group, Moody's Investors Service, Singapore</em></strong><br><br>"The extent of the cut was higher than market consensus, suggesting that RBI sees underlying growth trends as still subdued enough to require more aggressive stimulus. It also suggests that inflation is not the key risk at this time, in the RBI's view."<br><br><strong><em>Kunal Shah, Debt Fund Manager, Kotak Life Insurance, Mumbai</em></strong><br><br>"It is a positive surprise but some growth worries have also been recognised by RBI. It is overall positive for growth and markets. This is the first time RBI has said that it wants to keep real rates benchmarked to 1-year treasury bill. The 10-year benchmark bond yield may fall to 7.50 percent. The absence of monsoon fears is also another positive on food inflation."<br> </p><div><strong><em>Amit Modi, Wholetime Director ABA Corp & Vice President CREDAI Western UP</em></strong></div><div> </div><div>“This is a surprisingly good development, since easing interest rate will help revive health of businesses like Real-Estate which are highly sensitive to interest rate movements, but while it is indeed a step in the right direction, 50 basis points cut may not be enough to spur the investment cycle, there is definitely more required, and lending rates will have to further come down by at least one percentage point to improve the general sentiment towards investments in the country. We sincerely hope that both Finance Ministry as well as the RBI asks all the Banks to transfer the benefits to the end consumer, else this move will severely stop short of benefiting the consumer and only help in buffering the bottom lines of the bank."<br><br><div><strong><em>Getamber Anand, President, Confederation of Real Estate Developers’ Association of India (CREDAI), National</em></strong></div><div> </div><div>"The industry is welcoming RBI Governor’s announcement of rate cut by 50 basis points, this was long overdue. Not only in Real Estate, but across the manufacturing industries and businesses, everyone is feeling encouraged by this announcement. Besides this reduction, 1% SLR during the year (0.25% per quarter) is also a welcome move. This move is actually in coordination with the Prime Minister’s vision of making India an aggressive manufacturing destination.</div><div> </div><div>RBI Governor has previously stated that while rate cuts have happened, it has not translated into reduction of home loans. CREDAI appeals to all the banks to pass on this rate cut to property buyers who avail home loans. This is now imperative and it must be done to benefit the end user.</div><div> </div><div>All in all, the industry is extremely upbeat and we feel the Golden Era for Indian Manufacturing and Indian Businesses has begun. RBI Governor had also stated that they will be working in absolute tandem with the government dream for growth of our country and we are in full support for the same."</div><div> </div><div> </div><div><em><strong>Jai Shankar, Chief India Economist & Director, Religare Capital Markets</strong></em></div><div> </div><div>The RBI surprised by cutting repo rate by 50bps, while not completely closing the door for more accommodative monetary action in the future (next fiscal). There are a few other announcements in anticipation of Fed hike and to boost transmission. The overall dovish tone of the policy statement was even more surprisingly. The January 2016 target of 6 % inflation is likely to be achieved and in fact we may undershoot to 5.8%. In the monetary policy statement of April 2015, the RBI had said that it would strive to reach the mid-point of the inflation band (4-6%) by the end of FY17. Accordingly, the focus now shifts to a) bringing inflation to around 5% by the end of FY17 b) working with the govt. to remove impediments to monetary transmission (read ‘bringing down small savings rates’).</div><div> </div><div>The minimum risk weight applicable on individual housing loans is 50%. With a view to improving “affordability of low cost housing” for economically weaker sections and low income groups and giving a fillip to “Housing for All”, while being cognizant of prudential concerns, the RBI has proposed to reduce the risk weights applicable to lower value but well collateralised individual housing loans. This should be positive for the affordable housing category (average ticket size of 15 lakhs). </div><div> </div><div><em><strong>Lukman Otunuga, Research Analyst, ForexTime.com</strong></em></div><div> </div><div>The Reserve Bank of India (RBI) has shocked market participants today by not only cutting interest rates for the fourth time this year, but by a much larger amount than expected at 50 basis points. Although economic growth in India is strong, it is suffering from a decline in momentum and it is quite clear that the central bank are cutting interest rates to encourage further borrowing and to target domestic growth. The theme of falling commodity prices in addition to other concerns including the economic health of neighboring Asian nations have added downside risks to the Indian economy, and we can see this with slowing GDP growth.</div><div> </div><div> </div><div>It does appear that the probability of a continual slowdown in economic growth is high in India, and so the RBI has taken the steps to promote domestic momentum within the Indian economy. It has recently been reported that economic growth through credit has declined to yearly lows, meaning it is clear that lower interest rates are being used as a catalyst to boost investment within the Indian economy. It is also worth pointing out that RBI Governor Raghuram Rajan appeared confident that the inflation target at 6% can still be achieved, which moving forward means that if inflation is rising that there is limited scope for further interest rates cut from the central bank for the time being. This could actually be why the currency appreciated against the USD despite another interest rate cut.</div><div> </div><br>(BW Online Bureau & Reuters)</div>
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