Reserve Bank Governor Raghuram Rajan on Tuesday (29 September) sprang a surprise by effecting a more-than-expected interest rate cut of half a percent to boost the economy and bring down cost of home, consumer and industry loans, a decision that was matched by market leader SBI slashing lending rate by 0.4 per cent. Leading private bank ICICI and Axis Bank also indicated that they would bring down the lending rates while public sector Andhra Bank was first off the block, cutting interest rate by 0.25 per cent. While the RBI action will benefit borrowers, it will also lead to reduction in deposit and savings rate. The government also disclosed that it will review the interest rate on small savings, PPF and Post Office deposits, to bring them in line with market. Heeding to clamour from government as well as industry, Rajan effected the fourth cut in repo rate in 2015, the biggest in three years, on back of moderating inflation and favourable global commodity and oil prices. In its fourth bi-monthly monetary policy for the current fiscal, RBI cut benchmark repurchase (repo) rate from 7.25 per cent to 6.75 per cent, lowest in four-and-half-years. Rajan justified the reduction saying consumer inflation was likely to be at 5.8 per cent, below the 6 per cent target for January. The focus should now shift to bringing inflation to around 5 per cent by March 2017, he said, adding that RBI will be vigilant for signs of monetary policy adjustments that are needed to stick to the "deflationary path". RBI lowered its economic growth forecast for the current fiscal to 7.4 per cent from its previous projection of 7.6 per cent. Government and industry welcomed the RBI decision and nudged banks to transmit the benefit to borrowers to boost investments and economy. "This decision of the RBI will significantly provide policy support to the real economy and help in the recovery process. "We are looking forward now to the transmission of these cuts which will effectively help to boost confidence and investment. They will also help to realise the economy's medium term potential growth rate," Finance Minister Arun Jaitley told reporters here. Quick to act on RBI cue, State Bank of India (SBI) reduced lending rate by 0.4 per cent to 9.3 per cent per annum, setting a trend for a benign rate regime. .(Agencies)
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Banks will find it tough to pass on RBI rate cuts, argues Raghu Mohan At long last, the Reserve Bank of India (RBI) has obliged with a repo rate cut of 50 basis points (bps) to 6.75 per cent -- a four-and-half-year low. It left the cash reserve ratio or CRR (the proportion of deposits banks’ park with Mint Road) and the statutory liquidity ratio or SLR (the proportion of deposits to be invested in government securities) unchanged at four per cent and 21.5 per cent, respectively. Will you and I get to borrow cheap from here on? Will India Inc., go the whole hog and invest big time? Unlikely. Just read this line from RBI governor’s Raghuram Rajan’s policy text: “While the Reserve Bank’s stance will continue to be accommodative, the focus of monetary action for the near term will shift to working with the Government to ensure that impediments to banks passing on the bulk of the cumulative 125 bps points cut in the policy rate are removed”. The reference to a 125 bps cut is to those in the calendar plus today’s 50 bps. And what exactly are the impediments? What’s The Context Here…That Mint Road has gone in for a deep 50 bps cut in the repo rate – the price at which banks borrow funds from RBI – is a clear indication of the quagmire we are in. Let’s also get this clear: a repo rate cut does not lead to an infusion of funds into the banking system unlike a cut in the CRR or SLR (to the extent that banks have to invest less in government paper). On the latter, you also need to remember that given the times we are in, banks have taken the option to invest more under SLR. The RBI’s Annual Report for 2014-15 says banks continue to hold around 28 per cent by way of SLR despite a slash in it over time to 21.5 per cent (from 23 per cent). Mint Road’s reasons: “… the buffer providing access to collateralised borrowings from the wholesale funding market and the Reserve Bank. Maintaining excess SLR securities also helped banks to weather the impact of the current slow phase of the economic cycle on their balance sheets and earnings”. That’s why a 75 bps cut in the repo rate between January and June 2015 saw only 30 bps pass-on to you and I by banks. Lower bond yields mislead. Mint Road captures this reality when it notes that the financial markets have transmitted it’s past policy actions (lower yields on commercial paper and corporate bonds), but banks have done so only to a limited extent (as in lending rates have been stubborn). On Tuesday, the point was repeated: “The median base lending rates of banks have fallen by only about 30 bps despite extremely easy liquidity conditions. This is a fraction of the 75 bps of the policy rate reduction… even after a passage of eight months since the first rate action by the Reserve Bank. Banks’ deposit rates have, however, been reduced significantly, suggesting that further transmission is possible”, observes RBI. Will Banks’ Oblige From Here On?A month from now, Mint Road will come out with a new base rate (BR) calculation – marginal cost of funds from weighted average cost of funds; RBI intends to implement it from 1 April, 2016. Dhananjay Sinha, Head-Institutional Research at Emkay Global, is of the view that if implemented in its current form, these norms are likely to be negative for banks' NIMs (net interest margins) until the average cost of funds catches up with the marginal cost of funds. Why so? Bank deposits were contracted at a higher rate (only a relatively small portion of it were contracted at a lower rate after and during the cumulative repo rate cuts of 125 bps in the calendar so far; of which 50 bps happened only today). Therefore, a cut in the BR will only mean banks will have less to pocket for themselves. A way out, as Sinha says, is for banks to either increase the spread over the BR or let NIMs get impacted. Of course, in a rising rate environment, the proposed BR regime will work in favour of lenders as banks would pass on higher rates immediately. “Hence, we expect movements in BRs, and hence NIMs, could likely be volatile and frequent, which is likely to make banks' balance sheets more vulnerable to sharp interest rate movements””, adds Sinha. The essence of the above is banks have two options: either let NIMs dip and crib. As Pawan Agrawal, Chief Analytical Officer-CRISIL Ratings noted when RBI came out with its BR draft norms: “Our base-case is that profitability of banks will have a one-time impact of around Rs 20,000 crore in fiscal 2017, which would be equal to 15 per cent of the total estimated profit of the banking system for that year. The actual impact will depend on whether the banks will be given a leeway to make this shift over a longer timeframe in the final guidelines.” Agrawal says returns of banks that lend mostly on a floating rate basis will be significantly impacted in an environment of falling interest rates – as floating rate is pitched over the BR. As the BR falls (and along with it the floating rate), so will the interest income of banks. And that banks with low levels of current and saving accounts, or relatively longer tenure-term deposits, will also be majorly affected. That’s because their cost of funds will not come down soon enough -- as they will continue to pay interest to depositors at the old rate (before a policy rate cut). Or banks up the spread over the BR itself (which they are legally allowed to have anyway). If this happens, you will see a peculiar situation. Banks will publicly state they have dropped their BRs – not in proportion to the current repo rate cut, but a cut by a small margin – but when you actually go to borrow, the rate will more or less be at what they were before the current repo rate cut. Lower lending rates will be an illusion – that’s what most likely to happen anyway. What’s not to be lost sight here is that liquidity has not been issue at all; it sloshes about, but there have no takers for it at the banks’ credit window. Mint Road’s inter-bank money market numbers are reflective of the deeper rot in the economy. Liquidity conditions eased considerably during August to mid-September. Sure, in addition to structural factors such as deposit mobilisation in excess of credit flow, there was lower currency demand and pick-up in spending by the government which contributed to the surplus liquidity. The point is that the average net daily liquidity absorption by RBI (or what banks gave to the RBI) went up from Rs 12,000 crore in July to Rs 26,000 crore in August and to Rs 54,400 in September (up to September 15). Money market rates generally remained below the repo rate. It changed subsequently (as in RBI injected money), but that’s due to technical reasons -- quarterly tax collections went out of the system from mid-September, deficit conditions returned and the Reserve Bank engaged in average net injections of the order of Rs 54,400 crore (September 16th to 27th) which kept call rates close to the repo rate. Governor Rajan has pleased all and sundry with a repo rate cut – the shrill cries for it will taper off for a while now. The “focus of monetary action for the near term will shift to working with the Government to ensure that impediments to banks passing on the bulk of the cumulative 125 bps points cut in the policy rate are removed”. Let’s see how that part pans out!
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Saru Kaushal, Country Business Head of Global Corporate Payments, joined American Express Banking Corp in September 2014. According to Kaushal, the business climate in India has improved over the years and in the next few years, India will lead the world in economic confidence and investment. In an interview with Arshad Khan of BW|Businessworld, Kaushal talks about how India is one of the biggest markets for corporate cards in the world.
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Soon after reduction in repo rate by the Reserve Bank, country's largest lender State Bank of India (SBI) slashed minimum lending or base rate by 0.4 per cent to 9.3 per cent, setting the trend for benign interest rate regime. With the reduction in the base rate, all loans, including home, auto and corporate, would become cheaper by at least 0.40 per cent. The bank has decided to reduce the base rate by 0.40 per cent to 9.3 per cent with effect from October 5, SBI said in a statement. "RBI has cut interest rate by 0.50 per cent, we have reduced it by 0.40 per cent," SBI Chairperson Arundhati Bhattacharya said. The bank will also be cutting fixed deposit rates by 0.25 per cent across various maturities from October 5, she added. "We will definitely keep looking at ways and means of bringing down rate further. Going ahead, weakening of rate will add to growth of credit," Bhattacharya said. With the reduction, SBI's base rate is the lowest in the market. The reduction by the largest lender is likely to be followed by others. Meanwhile, Andhra Bank also reduced its base rate by 0.25 per cent to 9.75 per cent effective today. Base rate is the minimum rate below which a bank can't lend to consumers. On cost of fund, Bhattacharya said "on monthly basis, the fall is quite good, also the fact that there are more of retail deposits now than savings." RBI cut benchmark repurchase (repo) rate from 7.25 per cent to 6.75 per cent, lowest in four-and-half-years. The reverse repo rate, at which it accepts banks' excess liquidity, will be 5.75 per cent, while the cash reserve ratio has been kept unchanged at 4 per cent. Soon after the RBI policy announcement, Finance Minister Arun Jaitley expressed hope that banks will transmit the benefit to borrowers so as to boost investments and the economy. "We are looking forward now to the transmission of these cuts which will effectivEly help to boost confidence and investment. They will also help to realize the economy's medium term potential growth rate," Jaitley said.(PTI)
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Finance Minister Arun Jaitley welcomed the Reserve Bank of India's 50 basis points cut in interest rates on Tuesday (29 September), saying it would boost confidence and economic growth. The decision would also provide policy support, Jaitley told reporters, adding that the government was committed to meeting its fiscal deficit targets. Earlier, the RBI cut its policy interest rate to a 4-1/2 year low of 6.75 per cent, in a bigger-than-expected move that, with inflation running at record lows, could help an economy in danger of slowing down. Meanwhile, former Finance Minister P Chidambaram also welcomed the 0.50 per cent cut in interest rate announced by the RBI saying it was overdue. "I welcome the decision of RBI to reduce the repo rate by 50 basis points. This was perhaps overdue. "Nevertheless, it signals a movement towards a lower interest rate regime and it is therefore welcome," he said. He said more policy steps by RBI were possible if the government stayed firmly on path of fiscal consolidation. "If government stays firmly on the path of fiscal consolidation and fiscal prudence, we can look forward to more policy steps by the RBI," he said.(Reuters / PTI)
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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.A Reuters 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.Commentary Chandrajit Banerjee, Director General, CII 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. 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. Jyoti Vaswani, Chief Investment Officer, Future Generali Life Insurance “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. Today’s policy actions should be accepted positively by both equity and debt markets.”Sunil Sinha, Principal Economist, India Ratings and Research “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”. Chandra Shekhar Gosh, Founder and MD, Bandhan Bank “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. 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. 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”. Kumar Saurabh Singh, Partner, Khaitan & Co “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. 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.” Kishor Pate, CMD - Amit Enterprises Housing Ltd "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." Arvind Jain, Managing Director - Pride Group "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." Sunil Kanoria, Vice-Chairman, Srei Infrastructure Finance Limited "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." Anuj Puri, Chairman & Country Head, JLL India "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." Brotin Banerjee, CEO and MD, Tata Housing Development Company "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."Vineet Relia, Managing Director of SARE Homes "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." Vidya Bala, Head of Mutual Funds Research at FundsIndia.com "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. 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." Rupa Rege Nitsure, Chief Economist, L&T Finance Holdings, Mumbai"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."Navneet Munot, Chief Investment Officer, SBI Funds Management, Mumbai"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."Atsi Sheth, Associate Managing Director, Sovereign Risk Group, Moody's Investors Service, Singapore"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."Kunal Shah, Debt Fund Manager, Kotak Life Insurance, Mumbai"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." Amit Modi, Wholetime Director ABA Corp & Vice President CREDAI Western UP “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."Getamber Anand, President, Confederation of Real Estate Developers’ Association of India (CREDAI), National "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. 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. 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." Jai Shankar, Chief India Economist & Director, Religare Capital Markets 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’). 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). Lukman Otunuga, Research Analyst, ForexTime.com 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. 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. (BW Online Bureau & Reuters)
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In a big surprise for the markets, 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.Home and corporate loans will cost less as the central lowered the key interest rate by 0.50 per cent — the biggest cut in over three years — to bolster the economy A Reuters 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. The central bank has also cut the FY16 gross domestic product (GDP) growth target to 7.4 per cent from 7.6 per cent earlier. The equity market which was in the red till the announcement was back in the black. The market was widely expecting the RBI to go only for a token 25 basis points cut in view of the deficit monsoon and expectation that the US Fed will raise interest rates by December. It has kept the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liability (NDTL). The RBI justified the bigger reduction, saying consumer inflation was likely be running at 5.8 per cent, below the 6 per cent target for January, thanks partly to the government's efforts to contain food prices. The RBI also drew comfort from US Federal Reserve delaying the first hike in US interest rates in nearly a decade, according to a statement written by Governor Raghuram Rajan. Once US rates rise, analysts expect some emerging market currencies to come under pressure. "Monetary policy action has to be accommodative to the extent possible, given its inflation goals, while recognising that continuing policy implementation, structural reforms and corporate actions leading to higher productivity will be the primary impetus for sustainable growth" the RBI said. The benchmark 10-year bond fell 9 basis points to 7.64 per cent after the news. An interest rate cut had been widely expected after India reported consumer inflation had fallen to a record low of 3.66 per cent in August, and there have been calls from within government and industry for the RBI to lower borrowing costs. Still, it is unusual for the RBI to lower interest rates in September, as it has tended to be on the defensive against food price pressures during the monsoon season running from mid-June through September, after enduring several years of weak rains. Since adopting the repo rate as its main policy tool in 2004, the central bank had never cut rates during this period. This is also the biggest single monetary policy move taken by Rajan and it takes the repo to its lowest since March 2011. Since taking the helm of the central bank in September 2013, Rajan has raised the repo rate three times and lowered it three times, all by a magnitude of 25 bps. Calls for lower rates first began to grow louder after the release of data showing the economy grew by a slower-than-expected annualised rate of 7 per cent in the April-June quarter — faster than China, but well below the government's target of 8 to 8.5 per cent for the year ending in March. A rate cut is being seen as a key trigger to boost investment demand in an economy where credit growth has dipped to a multi-year low.(Reuters also contributed to this story)
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RBI’s commentary more critical than a token cut of 25 bp, says Ind-RaFocus on Tone of RBI: India Ratings and Research (Ind-Ra) expects the Reserve Bank of India (RBI) to take a gradual route of repo rate moderation (by 25bp to 7%) and sound cautious in its tone. This is because global headwinds can test the resilience of the rupee in the short term. We thus believe that the RBI will be less inclined towards suggesting aggressive accommodation. Nonetheless, any affirmative announcement on the medium-term framework for foreign portfolio investment limits in debt securities might spell cheer. All Measures of Inflation Down Sharply: In Ind-Ra’s view, a sharp decline in inflation particularly the GDP deflator should pave way for the repo rate cut. Retail inflation was down sharply to below 3.7 per cent (core inflation 4.1per cent) in August from 5.4 per cent (4.8 per cent core) at the time of RBI’s previous policy announcement. Wholesale prices have been falling in absolute terms and GDP deflator is negligible (GDP deflator is at its lowest in 16 years). Capacity utilisation for corporates is at a decade low according to a study by Ind-Ra (refer: Study of Capex Cycle of Top 500 Indian Corporates) and the slack should keep core inflation low. Commodity prices should also remain subdued given concerns on the global growth outlook and finally as exports continue to shrink, the onus of growth recovery remains with government spending and consumption. Bracing for US Rate Hike in 2015: We noted in the last edition of DebtFx that uncertainty will likely prevail in global markets on the delayed normalisation of rates in the US. We also opined that US dollar (USD) might be stronger than the majors and emerging market currencies in the medium-term. This has happened, but clearly earlier than we expected. "Cyclical" factors, notably rising US interest rate expectations, are once again supporting the USD. US Fed Chair Janet Yellen recently indicated that the central bank is poised for rate normalisation in 2015 just a week after keeping rates steady, citing global concerns. A slowing China, soft commodity prices and worsening financial market conditions also pose a risk to the growth outlook for several countries which have strong trade linkages with China. Widening credit default spreads for some of these countries suggest “Structural” concerns as well. Emerging market currencies and equity price movements are thus clearly reflecting risk aversion. Tactical Caution on Rupee: Ind-Ra believes RBI will have limited headroom for a significant rate reduction in the coming policy. Near-term outlook on the rupee might be clouded by a perception of risk. Hence, capital flows may flicker in response to the degree of global developments which could keep market edgy. While the broader theme of relative resilience of the rupee is intact, and the performance of the rupee relative to that of other currencies (down only 4.9% year to date, versus sharper cuts elsewhere in the EM space) is an indication of that, there still remains a case for rupee weakness on an absolute basis in such an environment. Gilts Supported Ahead of Policy: Ind-Ra believes a potential rate cut by RBI as also the likelihood of an announcement of a Foreign Portfolio Investment gilt limit hike (current: $30 billion) should keep gilts supported ahead of policy. Crucially, investors’ expectations of a further policy room for accommodation will be shaped by RBI’s assessment and further guidance, if any. Domestic government bonds have stayed in a broad consolidation phase over the past week, despite choppy currency movements.
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