RBI Keeps Repo Rate On Hold: Expert Views

The Reserve Bank of India (RBI) on Wednesday kept its key repo rate at 6 percent for a third straight policy meeting, and also retained its "neutral" stance, seeking to support economic growth even as inflation has accelerated to a 17-month high.

All but two of 60 economists in a Reuters poll predicted the repo rate would be kept on hold at its lowest level since November 2010.

COMMENTS:

Anjali Verma, Economist, Phillipcapital India, Mumbai

"The policy decision is in line with our expectation along with the hawkishness that is built into the statement. While we retain status quo from RBI for FY19, a risk to our call may come from higher inflation."

Aditi Nayar, Principal Economist, ICRA Limited, Gurugram

"As anticipated, the last planned review for FY2018 saw the Monetary Policy Committee (MPC) leaving the repo rate unchanged at 6 percent. Moreover, it retained the neutral stance of monetary policy and reiterated its commitment toward achieving the medium term inflation target of 4 percent."

"Despite the upward revision in the inflation forecast and concerns highlighted regarding growing inflation risks amid the crystallization of the fiscal slippage, the tone of the policy was not as hawkish as expected, given the comment that the nascent recovery needs to be carefully nurtured."

Radhika Rao, Group Economist, DBS, Singapore

"The central bank's stance was largely along expected lines, reflected in a relatively muted response in the bond and equity markets. The stance is tilted slightly towards hawkish, with headline inflation seen above target in FY19."

"They remain optimistic on growth, expecting FY19 to head back toward 7 percent. The guidance is likely to remain data-dependent, with a shift to tighten rates requiring further evidence in a built-up in inflationary pressures."

Motilal Oswal, Chairman & MD, MOFSL 
India's RBI kept the rates unchanged as expected. The verdict was 5:1 in favor of unchanged, and rightfully so!

RBI has two challenges to tackle with, one is the transmission of lower interest rates in the economy through banking system so that growth can be incubated at this juncture and second is to protect economy from global interest rates tightening started by USA.

The second challenge is more difficult than the first one as transmission of lower rates can happen with the improvement of asset quality of the banking system. The international challenge is more dynamic and needs monitoring.

Markets were expecting no change in the policy stance and will be considered non event, in the commentary RBI said, they wants to protect the early signs of recovery and keep economy conducive for the growth. This is a positive stance and goes well with broad market sentiments. We think these dips should be used to further build the position in the equity as the "earnings revival" is around the corner.

Anuj Puri, Chairman, ANAROCK Property Consultants
The Reserve Bank of India’s stance of keeping the repo rate unchanged at 6% is exactly along the lines of our expectations. Considering that the inflation has inched up (Dec-17 CPI at 5.21%, up from 3.58% in Oct-17 and well-above the target of 4%), crude oil prices are rising in the international market and the Government plans to increase the crop support price, maintaining the lending rates unchanged is justified. We believe that the interest rates will soon start inching upwards, which is already being factored into the rising bond yields for the past few months. The real estate sector can and should look at the long-term economic prospects and implications on which the monetary policy decisions are based, as these will dictate the growth trajectory for the sector.

Aditi Nayar, Principal Economist, ICRA
As anticipated, the last planned review for FY2018 saw the Monetary Policy Committee (MPC) leaving the repo rate unchanged at 6.0%. Moreover, it retained the neutral stance of monetary policy and reiterated its commitment toward achieving the medium term inflation target of 4%.

In line with our expectations, the decision to keep the Repo rate unchanged was not unanimous, with one MPC member voting for a hike of 25 bps.

Despite the upward revision in the inflation forecast for Q4 FY2018 and concerns regarding growing inflation risks amid the crystallization of the fiscal slippage, the tone of the policy was not as hawkish as expected, given the comment that the nascent recovery needs to be carefully nurtured.

The MPC appears to have looked through the impact of HRA in pushing up headline CPI inflation in the recent months.

In our view, the Committee would prefer to wait for additional data and is unlikely to tighten rates in the immediate term, which should help to contain G-sec yields to some extent. However, if inflation exceeds the MPC's forecasts in a sustained manner, a rate hike toward the second half of 2018 may not be ruled out.

In our view, the RBI is unlikely to conduct OMO purchases in the near term.

Jaikishan J Parmar, Research Analyst, Angel Broking
Along expected lines, the monetary policy kept status quo on rates but turned the tone of the policy slightly hawkish. So the repo rate stays at 6% but the policy has guided a full year GVA (Gross Value Added) growth of 6.6% and inflation rate in excess of 5.1%. This higher CPI inflation is a consequence of higher food prices due to more aggressive MSP for farmers and also the potential impact of further hikes in crude oil prices. While the policy has avoided mention of interest rate hikes, the accent on a neutral monetary stance, recovery in GDP growth and higher inflation expectations are indicative of possible rate hikes during the year.
 
There are two important announcements in the policy that could have relevance for the inflation expectations. Firstly, the Monetary Policy Committee (MPC) has admitted that the 30 basis points rise in fiscal deficit for the next 2 years could be inflationary. Secondly, the staggered impact of higher HRAs by various state governments could also put pressure on inflation. While the MPC has spoken about inflation sobering to 4.6% level in the second half, which does look unlikely at this point of time. The policy has not made any mention of support to the bond market prices by the RBI as anticipated by the bond market traders. Overall, the undertone of the policy is hawkish.

(With inputs from Reuters)