RBI cuts repo rate: Bankers happy, some say yeh dil maange more By STAFF REPORTER The Reserve Bank of India (RBI) on Tuesday cut the short-term lending rate, or repo rate, by 25 basis points to 6.25 per cent from 6.50 per cent earlier. The fresh repo rate cut has resulted in a cumulative 175 basis points drop in policy rate since January 2015. The central bank maintained status quo on cash reserve ratio (CRR), which stands at 4 per cent while statutory liquidity ratio (SLR) remained unchanged at 20.75 per cent. This was the first exercise by the monetary policy committee (MPC), chaired by Governor Urjit Patel. KEY HIGHLIGHTS >> RBI cuts repo rate as expected by us by 25 bps to 6.25%. (Reverse repo stands now at 5.75% >> Other reference rates were kept constant. >> RBI stated that it expects inflation to be in the 5% to 5.3% range by Jan- Mar 2017 with upside risks. >> Upside risks to inflation may be triggered by food inflation, government salaries and increase in minimum wages. >> On the other hand, RBI doesn’t seem too concerned with the impact of GST. It held that the inflationary impact of GST may be one off and may dissipate after about a year. >>It reiterated its accommodative stance and committed itself to the trajectory of about 5% by March 2017. >> It also forecasted the gross value added growth to be about 7.6% in 2016-17 and at about 7.9% for 2017-18 We collated the reactions of various industry leaders to the money policy outcome. Chanda Kochhar, MD and CEO, ICICI Bank I welcome RBI’s move to cut the repo rate by 25 basis points as well its intent to support liquidity. These steps will give a strong impetus to both consumption and investment led growth for the country. The strong focus by the government on supply side measures, which have resulted in containing inflation, has provided room to RBI to support growth through this rate cut. Bekxy Kuriakose, Head – Fixed Income, Principal PNB Asset Management RBI cut the benchmark rate by 25 basis points in its first policy meeting under Monetary Policy Committee, with all the 6 members supporting the cut. The policy outcome was as per market expectation, which had partially factored in the rate cut in the prices. The statement spoke about the slowing momentum of food inflation and reduction of small savings rate and felt that the upside risk to inflation was somewhat lower than last policy statement. In the post policy con-call RBI spoke about real interest rate around 1.25 per cent, compared with 1.5-2,0 per cent earlier. We expect another 25 basis rate cut by March 2017. Dipen Shah, Senior Vice President & Head PCG Research, Kotak Securities Markets ended a volatile day in the green as the RBI expectedly cut interest rates by 25bps. RBI mentioned that, it is open to a real rate which is marginally lower at 125bps as against 150-200 bps earlier, which is a dovish stance. Moreover, it will allow banks to treat ‘sustainable debt’ as standard asset, which will provide a breather to the banks. However, the MPC has mentioned that, it will be supportive of growth while targeting CPI inflation of 4% (+/- 2%) and this indicates that, the rate actions would be calibrated towards accommodative stance for supporting growth. Further, the first MPC decision was unanimous, which bodes well for coordinated actions. We expect RBI to be on hold at least in the next meeting, as CPI inflation shall remain elevated at ~5% till March 2017. Also, this meeting will take place just before the US Fed meeting in December. We are positive on the rate sensitive sectors – especially Banking / NBFCs, Auto. We are also positive on the infrastructure sector, specifically the road construction sector, which will also be benefitted by lower interest rates. VP Nandakumar, MD & CEO, Manappuram Finance Tuesday’s announcement of a 25 bps cut in policy rates by monetary policy committee of the RBI is welcome news for business and industry. It affirms RBI’s confidence in containing inflation within targeted limits. Since January 2015, there’s been a cumulative reduction in policy rates of 175 bps which has brightened the outlook for NBFCs. With Tuesday’s rate cut, NBFCs can look forward to a further reduction in borrowing cost. Arun Gopalan, Vice-President, Research, Systematix Shares & Stocks After a long time, there seemed to be a narrower gap between those expecting a rate cut and those who didn’t. So the 25 bps cut in the Repo Rate did not surprise the markets and we believe this would generally have a neutral impact. We may see intraday volatility, but thereafter we expect the focus to shift to real economy and corporate earnings. At the same time, the 25 bps cut is indicative of the underlying good health of the economy and signals that the situation has progressively improved. The MPC has acknowledged the strong improvement in Kharif sowing leading to a consequent lowering of the fear of food inflation. Retaining the Real GVA estimates for FY17 at 7.6% indicates a belief in the gradual improvement in the underlying economy. There is no indication in the Policy that there needs to be a pause or a change in the direction of the interest rates. George Alexander Muthoot, Managing Director, Muthoot Finance The 25 bps cut by RBI to boost liquidity in the system is a welcome move. We expect it will support the economy’s investment demand and uptick in credit environment. A relief on the cost of funds is awaited eagerly by the corporate India, which should help them to improve financial health and plan for the next leg of growth. With the pro-growth stance of the RBI, it gives a clear hint to India Inc to push for growth, take investment decisions as it can now foresee rates to soften further. So in summation the interest rate scenario should change for good in FY17. Rajeev Talwar, CEO, DLF The 25 basis point rate cut has come at the right time. A near-normal monsoon, robust sowing for the kharif season, and supply side measures to curb food inflation have given the Reserve Bank of India the necessary space for rate cut right at the beginning of festive season. No wonder the six-member Monetary Policy Committee voted 6-0 in favour of a cut. With the economy at take off stage, rate cut now augurs well for the industrial sector and should give a boost to overall demand in the economy. Already, the sizeable public investment in roads, railways and inland waterways, strong auto sales numbers in September, and rising demand for both steel and cement suggest that the economic growth is picking up pace. Further, the finance ministry has taken unprecedented structural reforms and launched multiple steps absolutely in the right direction to bolster the economy. We now earnestly hope that the banks will quickly pass the benefit of this repo “rate cut to their customers by bringing down their lending rates, given the easy liquidity conditions and the recent downward adjustment in small saving rates. A cut in home loan rates will surely help buyers firm up their decision to buy a house in this festival season and give fillip to sales.” Mihir Vora. Director and CIO, Max Life Insurance RBI has cut policy rates by 25 basis points, a couple of months before our expectations. This is the first monetary policy announcement under the framework of the Monetary Policy Committee. All 6 members of the committee voted in favor of a 25 basis points cut. RBI has taken cognisance of global as well as domestic factors. Global growth and trade has slowed down more than expectations in the past few months and domestic inflation seems to be on target of 5% by March. However, the Governor highlighted upside risks to inflation as a result of the Seventh Pay Commission payouts by the central and state governments. Growth forecasts for India have been maintained. The RBI remains committed to maintaining positive liquidity. Overall, while the rate cut was a mild positive surprise, the policy commentary was not as dovish as expected by the markets. We have been expecting 50 basis points rate cut in this financial year, out of which 25 basis points have been delivered. We expect another 25 basis points reduction in policy rates during the current financial year. Kunal Shah, CFA, Fund Manager, Debt at Kotak Life Insurance The Monetary Policy Committee (MPC) has reduced repo rate by 25bps sighting downward shift in the momentum of food inflation. The move was in line with our and market expectations. The policy stance continues to remain accommodative by ensuring neutral to positive banking system liquidity. Easy liquidity conditions will ensure monetary transmission. RBI acknowledges measures from government to cool food inflation particularly in pulses. It believes these measures will have benign impact on food prices. The committee believes the cost push pressures may emerge in future due to implementation of HRA and increase in minimum wages. However, committee sees the pressures to be one-time and is likely to see through these episodes. MPC also believes real neutral rate can be maintained between 1.25-1.50% sighting global standards; probably giving room for more easing. We see policy stance on a dovish side as was expected by market participants for a while. We believe MPC can vote for another 25bps deduction in current financial year if inflation surprises significantly below 5% by March 2017. Bond market will probably consolidate at current levels of 6.75-6.80% after sharp decline in yields in recent months. Dinesh Thakkar CMD, Angel Broking RBI’s first policy meet after constituting the monetary policy committee (MPC) has been a constructive one with, all the members of the committee unanimously agreeing for a 25bps cut in the REPO rate, accordingly the REPO rate has been reduced by 25 bps and now stands at 6.25%. We believe the rate cut was very much required for the economy, and if inflation data supports there could be another cut of 25 bps towards the end of the financial year. The CPI inflation positively surprised for the month of August when it declined by 102 bps to 5.05% compared to 6.07% in July 2016. This had given a positive signal for the rate cut during the current policy meet. Rising food prices was the prime culprit behind the increasing trend in inflation; however a softening price in food and vegetables on the back of good monsoon led to positive surprise in food inflation in August. While RBI has hinted that there is a marginal upside risk to inflation, we believe this year crop output could be much better than the previous year, and hence pressure food inflation is unlikely emerge any time soon. The RBI believes inflation will be contained at 5% by March, 2017. With G-sec yield softening the cost of funds of banks should also now come down further; this could lead to better transmission in rates for banks. Kumaresh Ramakrishnan, Head-Fixed Income, DHFL Pramerica Asset Managers Reiterating its accommodative monetary policy stance, the newly constituted Monetary Policy Committee (MPS) voted 6-0 for a 25 bps cut in policy rates to 6.25%. Other key policy rates such as CRR, SLR remain unchanged. The policy balanced the rate easing by simultaneously flagging off upside risks to the headline CPI of 5% by March 2017. The MPC resolution noted that higher sowing in the kharif season along with supply management measures will help keep food inflation in check. However RBI noted that ongoing 7th pay commission pay-outs, proposed rise in minimum wages and hike in MSPs (winter crop) could potentially generate impulses that could lead to price pressures. On balance, the policy tone appears conservative without sounding hawkish. Given that core CPI is still in the 4.4%-4.7% band, the CPI glide path from 5% (projected by March 2017) to 4% (projected for 2018) could be more challenging in our view, than the CPI journey from 6% to 5%, witnessed thus far. While we remain in an easing cycle, further rate actions in our view are likely to remain even more data dependent. Shreyash Devalkar, Fund Manager – Equities, BNP Paribas Mutual Fund Taking cues from positive overseas and domestic announcements, key benchmark indices in India traded in the green through the day to finally close with gains of over 0.25%. The monetary policy committee (MPC) set up to take decisions on interest rates and comprising six member which includes the current Reserve Bank of India (RBI governor Urjit Patel, made its debut today at the fourth bi-monthly monetary policy meeting with a 25 basis point cut in Repo rates. RBI’s key lending rate now stands at 6.25%, as the MPC feels that the current inflation scenario warrants a reduction in lending rates. In overseas stock markets, Asian stocks rose after data showing expansion in US manufacturing boosted optimism over the health of the world's largest economy. Barring media, all other sectoral indices on the National Stock Exchange (NSE) traded in the green with PSU bank and metal stocks leading the pack of winners. Motilal Oswal, Chairman & MD, Motilal Oswal Financial Services New RBI governor has come up with aggressive stance, with 25 BPS rate cut in his maiden policy. While the CPI which is the new barometer of inflation is taming down over the period, the debate was now or later. The RBI Governor, by cutting the rats, seems to have favored growth argument over inflation control.. This will create an enabling environment for the economy to gather momentum further aided by better monsoons and seventh Pay Commission bonanza. The cut will also allow banking sector to pass on the benefit of lower interests, in turn stimulating economy. With the trio of - good monsoon, 7th pay commission and now the rate cut - in place, we look forward to a having a bumper festive season, allowing kick start of the corporate earnings. I continue to remain bullish about the market. Lakshmi Iyer, CIO (Debt) & Head of Products, Kotak Mutual Fund While a sizeable market expected a no-change, we were of the view that repo rate cut was on the cards. In giving the repo cut, the Monetary Policy Committee (MPC) has seized the moment provided by moderating inflation, good monsoon and the US Fed postponement of their hike. We believe that room exists for future rate cut; albeit the timing would be data dependent and may gauge for the US Fed stance, and for the 7th pay commission pay-out impact. Investors may also seek allocation in the Accrual/Duration and Bond Short Term funds. Rana Kapoor, MD & CEO, YES Bank The inaugural policy of the MPC and the Governor is full of growth conviction, business confidence and effective communication by the Governor and the DGs. This highly collaborative and participative MPC methodology has got onto a Flying Start. The maiden policy decision taken by RBI’s MPC is completely justified by the ongoing disinflation in the economy. Today’s rate cut will boost sentiment and contribute towards reinvigorating growth impulses in the infrastructure, construction & manufacturing sectors. Backed by a healthy set of domestic macros and sustained global deflation, I expect 75 bps further easing in the coming months. Jimeet Modi, CEO, SAMCO Securities The monetary policy committee of RBI unanimously decides to cut repo rate by 0.25%. The rate cut could have been triggered due to normal monsoon, slowdown in global growth expectations, lower domestic inflationary expectations in the near term and global liquidity inflows that prompted the decision to cut interest rates so that the capital formation in the economy further picks up with lower cost of capital. However a slight caution on account of payout of Seventh Pay Commission could trigger some inflationary pressures was visible from the tone but overall the pronouncement of accommodative monetary policy is positive for the Indian economy and the stock market in the medium to long term. Killol Pandya, Head Fixed Income, Peerless Funds Management Overall, the policy was largely balanced in its nature. RBI has cut Repo rate but has also sounded cautious about inflation in the coming months. The policy is largely positive for domestic bond markets in the near term. However, we shall have to watch the incoming data prints regarding inflation to estimate how RBI nuances its policy in the coming time. We reiterate our positive outlook for our bond markets with a medium to long term investment perspective Murthy Nagarajan, Head of Fixed Income, Quantum AMC RBI cut the repo rate as expected and more importantly all six members of the newly formed MPC voted towards the 25 bps cut. This shows major consensus on the decision which should be well taken by the markets. But there is little else in the document that indicates on the future trajectory of inflation and rates and it is thus difficult to guess RBI's next move. We expect it to continue with proactive liquidity management which should enable further cut in lending rates and lower EMIs in the near future.” N S Venkatesh, Executive Director, Lakshmi Vilas Bank The first policy of the MPC committee under the new governor Dr Urijit Patel has continued with the accommodative stance to foster growth in the economy. The inflation expectations have been well anchored. The smoothening of S4A guidelines will help the easier resolution of stressed assets and will be a relief to the banking system. Overall it is a pragmatic policy with focus on growth. Rajat Gandhi, Founder and CEO, Faircent We welcome the reduction in the rate cut. Since large number of our borrowers are micro-SMEs or self-employed the increased liquidity would definitely revitalise this key segment and boost the economy. As the leading alternative lending platform we have been witnessing higher lender interest over the last quarter, which is a pointer to increased supply, therefore we were anticipating a rate cut. Improvement in the liquidity conditions would further help in boosting the credit scenario of the economy. Adhil Shetty, CEO and Co-founder, Bankbazaar.com The 25bps cut brings down the repo rate to a six-year low of 6.25%. This is excellent news for borrowers who can expect a reduction in their outflows. Existing borrowers on the base-rate model can expect the reduction to reflect in their EMIs or tenor in the next few weeks while those on MCLR will have to wait for their next reset to see the effects. Nevertheless, this is a great time for new borrower.” Mustafa Nadeem, CEO, Epic Research The Reserve Bank of India (RBI) on Tuesday cut repo rate by 25 bps to 6.25 percent. Reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.75 per cent. All six members of the monetary policy committee voted in favour of cutting repo rate. on the other end SLR remains same. In its policy statement, the central bank said that the decision of the monetary policy committee was consistent with the accommodative stance of the monetary policy. Retail inflation is expected to be 5 per cent by March 2017 with upside risk. The stock market reacted sharply with the benchmark indices losing close to 1 per cent in a hurry soon after the policy announcement. The S&P BSE Sensex fell by over 300 points and Nifty50 plunged towards its next support level at 7,650. There will be ease in liquidity which will help both PSU as well as private banks to focus on lending, which is very important to boost economic growth and kick start the capex cycle of India. Rather it is advisable to liquidate short term fixed deposits and invest in less risky mutual funds or government infrastructure bonds, keeping your long term fixed deposits safe. Vimal Bhandari, MD and CEO, IndoStar Capital Finance The repo rate reduction by 25 basis point would be a strong endorsement that inflation is under control with price and output stability on the agricultural front. The transmission of rate cut would not only revive consumption in all segments of economy, but will also act as an impetus for new investment by the private sector. Arun Singh, Lead Economist, Dun & Bradstreet India Tuesday’s rate cut was mostly in line with the market expectations and is front loaded. While the overall rhetoric was neutral, future monetary policy action is contingent on further moderation in CPI inflation along with clarity on FED movement. Implementation of 7th Pay commission along with expected improvement in rural demand are likely to help overall demand and keep inflation elevated. Further, any uncertainty on global commodity price front might put additional pressure on inflation. In fact, current moderation in CPI inflation was largely driven by only few commodities. Now the focus has to be on the transmission of monetary policy as lending rate is still elevated. Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank Reacting to the recent deceleration in food prices and hence overall headline inflation, RBI delivered a 25bps repo rate cut. While maintaining an accommodative stance, RBI has sounded cautious on upside risks to inflation. The room for further accommodation looks limited from hereon given the upside risks emanating from an increase in aggregate demand due to 7CPC, good monsoons, GST implementation and HRA increase from 7CPC. Shanti Ekambaram, President – Consumer Banking, Kotak Mahindra Bank The first MPC meeting announced a repo rate cut of 25 best, has been as per expectations, in-line with the softening of inflation. The normal monsoon and record agricultural sowing have softened food prices, indicating that inflation will be on the desired trajectory. Monetary policy stance remains accommodative. It is likely to be data driven on inflation, with caution on impact of 7th Pay Commission. Overall growth estimates for the year remain at 7.6 per cent. We shall continue to watch out for economic data and accordingly address transmission of interest rates. Uptick in industrial activity due to government expenditure in infrastructure and clearing backlog of projects have all contributed to positive momentum in cement, steel etc. Key observations were around low growth outlook globally and Brexit, which have slowed global trade sharply. This, coupled with easy liquidity, are likely to continue to keep global rates soft.