RBI holds rates, leaves door open for more softening

The following are reactions from industry experts and analysts on RBI’s monetary policy announced today.

The FICCI president said she expected the central bank to reflect on the decision considering the scope of rising inflation. The RBI status quo was widely anticipated by the market participants. Though, it is mainly on account of food prices. They will have to be carefully monitored as they tend to be sticky and impart an upward bias to inflation and inflation expectations. Hence, in near term 10y yields can remain in a range of 7.75-7.85%. A basis point is one-hundredth of a percentage point.

The decision by the central bank was in line with the forecasts of 21 economists in a poll conducted by VCCircle last week. Critics added that the wait and watch policy employed by the RBI could hurt growth in the economy in the near term. RBI has also hinted that GoI should push for passing of the land acquisition bill along with sorting out the issues in power sector. Leading public and private banks cut their base rates (minimum lending rate) by 25-35 bps so far this year.

These developments, supported by contingency plans for vulnerable districts, provide cushion against adverse weather shocks. It is hard to hazard a guess on what move the RBI would be taking on Tuesday, but interest rates are on a downward trend.

Attention is now focused firmly on the Federal Reserve in the US, and of course, the Bank of England in the UK, as both central banks approach their first interest rate hikes since the financial crisis. “The Government and the RBI have reached a broad consensus on what the committee should look like and what the role of the Governor would be”, Raghuram Rajan said.

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.

Most bankers and specialists consider that the potential for an interest price cut by the Reserve Bank could be very low as retail inflation stays excessive.

George Buckley, chief UK economist at Deutsche Bank, pointed out that Carney has sought to signal an impending rate rise in the past, before being blown off track by the unexpected weakness of the economy. “We see the RBI reiterating its data-dependent stance”.

Nifty August futures were trading at lower levels a bounce was seen post policy announcement. Going forward food inflation and Fed Reserve action would be key determinants of policy action. Clearly further rate cuts would become increasingly hard as we get closer to the US rate event. Consequently, kharif sowing has expanded significantly relative to a year ago, especially in respect of oilseeds, pulses, rice and coarse cereals. Easy liquidity has resulted in lower funds being drawn under the liquidity adjustment facility, a central bank window to lend or borrow short-term money.

” It’s more reasonable to go back to pattern during some time”.

“It is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy”, Dr. Rajan added.

“Currently the situation is that the governor has a veto”.

“We are looking whether the recent increase in inflation is temporary and whether the monsoon will continue to be near normal”.

Meanwhile, pay growth has accelerated to 3.2%, its strongest pace in five years and ahead of the bank’s prediction in May that pay would only rise by 2.5% this year. “We have been engaged in a dialogue with the government”.

Though the policy was as expected, experts say that there will be rate cuts in the future since commodity prices are softening and monsoon is progressing better than was expected.