RBI Monetary Policy: Corporates disappointed, Financials not surprised

Reserve Bank of India governor Raghuram Rajan today kept key interest rates unchanged, even as he reduced mandatory cash-reserve requirements for banks in an effort to make more money available for lending.

The broad reaction from the market – whether from corporates or financial services industry – was that the development was on expected lines.

However, realty and banks stocks corrected, indicating that some investors were hoping against hope for a cut.

We bring you a synopsis of who said what on the RBI Monetary Policy.


Arundhati Bhattacharya, Chairman, State bank of India

RBI policy was in line with market expectations of a status-quo. The SLR cut is expected to provide growth supportive liquidity of about Rs. 45,000 crore. The flexibility regarding the DCCO will enthuse companies with strong balance sheets to consider taking over stuck Projects. With inflationary expectations at a 21 quarter low and coupled with a benign global environment, we are in the early phases of a prolonged rate easing cycle.

VR Iyer, CMD, Bank of India
Mrs. V.R.Iyer, MD, BOI The policy was along expected lines with regard to status quo in policy rates. Since no significant development took place after January 15th, when the last rate cut took place. Further moves depend on fiscal consolidation and evolution of global and domestic developments.

Primarily the GDP numbers expected on 9.2.2015, inflation numbers and fiscal road map to be laid down by the Government in the next Budget will form the basis for the next move on rate cut.

Liquidity in the system has been seen at comfortable level. SLR cut by 0.50% (from 22.00 % to 21.50%) will make about Rs 43000 crore available to the banking system for lending. This may push banks to respond to repo rate cut introduced on 15.1.2015 by RBI. Export Refinance has been done away with and RBI now intends to introduce liquidity through LAF only.

Increase in LRS to USD 250,000 reflects confidence of the Regulators in consistency in foreign inflows. Reinvestment of coupon on investments by FIIs has been permitted over and above the ceiling of USD 30 Bn in Government securities. With increase in minimum investment period to 3 years in corporate bonds, there will be stability in investment and the volatility will reduce.
Regarding inflation, the tone was dovish and RBI expects it to be below 6% by January 2016. The policy is pro-growth.

The Reserve Bank of India (RBI) kept its policy rate unchanged at 7.75% during its monetary policy review meeting on Tuesday, February 3, nearly three weeks after surprising the Street with a 25 basis points (bps) cut on January 15. Policy action at its next meeting in April will be determined by how consumer price inflation for January and February prints, and developments in the Union budget for the next fiscal. We expect the RBI to cut rates by 50-75 basis points through next fiscal. However, transmission of lower policy rates to lower lending rates and eventually growth will be a slow process given high non-performing assets (NPAs) at banks and downward rigidity in lending rates.

On January 15, the RBI had said further easing would hinge on data confirming disinflationary trend and sustainability of high-quality fiscal consolidation. Since there were no new developments on this score, rates stayed on hold.

We now expect the RBI to cut rates by 50-75 basis points through the next fiscal. How quickly they come about will depend on the quality of fiscal consolidation and measures to improve the economy’s potential so that higher GDP growth does not set off fresh price fires. We expect inflation, which has fallen below the RBI’s expected trajectory in recent months, to average 5.8% in 2015-16.

On Tuesday, the RBI reduced the statutory liquidity ratio (SLR) by 50 bps to 21.5% of net demand and time liabilities (NDTL). This improves the elbow room for banks to expand credit and boost growth.

The RBI also replaced the export credit refinance (ECR) facility with the provision of system-level liquidity. Given low recourse to ECR because of comfortable liquidity in the banking system, and in an attempt to do away with sector-specific refinancing, the RBI has merged ECR with system-level liquidity provision. Cash reserve ratio (CRR) was unchanged at 4% of NDTL.

The RBI also revised its GDP growth forecast for 2015-16 upwards to 6.5%. It also said the new GDP series (with 2011-12 as the base year) and advance estimate for 2014-15 could result in yet another revision of its growth projection for next fiscal. We will revisit our GDP growth outlook (at 5.5% and 6.3% for 2014-15 and 2015-16, respectively) once the Central Statistical Organisation releases third-quarter estimates for 2014-15 on February 9.

Care Ratings
The RBI has spoken again of fiscal consolidation which gives the impression that it will use the Budget as the next point of reference before taking any further action in interest rates. RBI is cognizant of the fact that the CPI inflation number could be higher this season and will have 2 additional reference points before taking a decision in April.

We expect RBI to reduce the repo rate by 25 bps in the post budget policy, provided the inflation numbers for January have moved in downward direction. Based on ceteris paribus conditions we still expect rates to be cut by another 75 bps this calendar year.

RBI has been speaking of a range of 1.5-2% for real interest rates which can hence give one an idea of when the repo rate will be cut based on the prevailing CPI inflation number during the course of the year.

The GSec yields have been range bound between 7.5-7.7%. The growth in deposits is expected to slow down owing to once the payments are made for the disinvestment programme. A pickup in credit is also expected because of the coming spectrum sale which will result in enhanced demand for credit. Hence rates would tend to move upwards during March when the advance tax payments are due.

Removing export credit refinance and enhancing amount under the liberalized remittance scheme, will not have a significant impact on either exports or outflow of dollars respectively.

Naresh Takkar, Group CEO, ICRA
Having recently reduced the policy rate in mid-January 2015, the RBI on expected lines maintained the Repo rate at 7.75% as well as the CRR at 4%, as it awaits further information on the fiscal outlook and evidence that the moderation in inflation is sustainable, before resuming the rate cut cycle. While monsoon dynamics, geo-political risks, reversal of crude prices and heightened forex volatility remain key upside risks, the inflation target of 6% by January 2016 is likely to be achieved. Therefore, we expect the Central Bank to cut the Repo rate by a further 50 bps over the next few quarters.

With year-to-date credit off-take remaining subdued, the Central Bank cut the SLR by 50 bps to 21.50%, in a nudge to Banks to increase lending to the productive sectors of the economy on competitive terms. This would also help Banks to adhere to the liquidity coverage ratio under Basel III. Additionally, the concept of non-callable deposits would help the Banks in their liquidity coverage matrices, but would need enhanced levels of depositor education on the non-callable features.

While the imposition of a minimum residual maturity of three years for fresh investments by FPIs in Corporate Debt could impact near term flows, the removal of the lock-in clause for FPIs in corporate debt could potentially improve secondary market trading volumes and aid in development of the domestic corporate bonds market. Further, allowing the reinvestment of coupons in G-sec indirectly increases the G-Sec limits for FPIs by around $2-2.5 billion.

Through the announcements on increase in limits on exchange traded currency derivatives and introduction of cash settled Interest Rate Futures across additional tenures, the Central Bank has further strengthened the financial sector infrastructure.

Sujan Hajra, Chief Economist, Anand Rathi
As expected the RBI today kept the key policy rates (repo and reverse-repo) unchanged as also the CRR rate. The 50 bps cut in SLR is largely inconsequential right now with banks, in aggregate holding excess SLR to the tune of 500 bps over the statutory limit. Given the balance sheet position of the PSU banks (the main holders of excess SLR), broad-based sale-off of SLR holding looks unlikely. Yet from a medium-term perspective (as PSU banks get capitalized and credit demand improves) the progressive SLR cuts by the RBI would be helpful for banks.

Next rate cut. With no clear guidance, the timing of the next rate cut remains uncertain. At the very minimum, the RBI is likely to wait till the Union Budget and if the fiscal deficit numbers (3.6% of GDP or below for FY16) and planned steps to cut the deficit looks encouraging (cut in revenue rather than capital spending) another 25 bps rate cut in early Mar’15 cannot be ruled out. The more likely case, however, is 25 bps cut in the Apr’15 policy (if both the fiscal and inflation number remain with RBI’s comfort zones).

Positive impacts. Banking. Pvt. sector banks because these banks can now switch incremental deposits to credit rather than SLR investment and the former has better blended yield over the latter. Moreover, change in asset classification norms for restructured assets where management of the company for which asset getting restructured is under change, is likely to reduce provisioning requirement. This would help both the private and public sector banks.

Positive impact. IT/Pharma. Along with the RBI buying forex (forex reserves at record high), the RBI in today’s policy has liberalized norms for forex outflow. At the same time, there has been no move to materially attract foreign portfolio inflows (in the debt market). These suggest that the RBI probably finds rupee to be overvalued. A weaker rupee should help sectors with large forex revenue.

Marginally negative for debt market. While cut in SLR requirement, no material improvement in FII in debt market and RBI’s attempts to let rupee depreciate, are all negative for the debt market, these are likely to get largely neutralized by an improving fiscal situation (and thereby falling market borrowing requirement).

Morgan Stanley
For banks, the key measures have been relaxation in LCR and restructuring norms. We believe the higher flexibility in case of promoter change at the time of restructuring will help incentivize the process of asset transfers, and force out willful defaulters.

Pranjul Bhandari, Chief India Economist, HSBC
Governor Rajan stressed that there were too few new data points for the RBI since 15 January to cut policy rates again. And there were several milestones coming up which needed to be internalized before the central bank can take further action; namely, new data on the quarterly path of the improved GDP series (9th February), first release of the new CPI series (12th February) and details in the union budget (28th February).

On fiscal consolidation, the emphasis was on the “package” of consolidation. We think the RBI will watch out for better quality fiscal consolidation which lowers current expenditure while increasing capital expenditure in infrastructure. We have previously argued that higher public investment is critical for kick-starting the growth cycle, and this can be done in a fiscally responsible way.

The 50bp cut in the SLR may not create additional headroom immediately, given that banks have been parking excess funds in SLR bonds. However, it is a part of RBI’s efforts on setting the stage of loose liquidity so that banks start cutting lending rates soon. By past experience, monetary transmission takes about two to three quarters.

Our GDP and inflation forecasts are both a tad lower than the RBI’s. We believe that several disinflationary forces have converged and the output gap is likely to be negative through 2015, opening up some space for rate cuts (see: India Central Bank Watch: Scouting for space). The RBI also reiterated its preference for real rates of between 1.5% to 2%. Back-of-the-envelope calculations suggest that with inflation averaging 5.5% over the next two years (as per our forecasts), real rates of 1.5% to 2% open up space for an overall 75bp rate cut in 2015.

As such, we think that going forward, the RBI will find space to cut rates by 50bps, making it a total of 75bps in cuts in 2015. We expect the next rate cut in mid-March, after the union budget and February inflation prints are released. And we expect the final cut in the June policy meeting, at which point we believe the meteorologists will know with some certainty whether monsoons will be normal.

Market expectations of 125-150bps in rate cuts are overdone in our view. We believe the space to cut more than 75bps this year is constrained by the RBI’s intention to reduce inflation further to 4% +/-2%, during a period, where we think economic growth will be ticking up, putting pressure on core inflation. Another factor to note is that the new CPI series assigns a higher weight to core inflation (47.3% vs. 42.9% in the current series), which the RBI will have to be mindful of.

Cholamandalam Securities
Given, that there was no substantial new developments on the disinflationary process or on the fiscal outlook since January 15, it is appropriate to await them and maintain the present interest rates. Moreover, the latest development in form of a revised base for the current CPI is to expected lower the volatility in inflation levels further, considering a reduced weightage for food and fuel components. With inflation momentum stabilizing and the recent survey on household inflation expectation down to a single digit, the key factor to have prominence in the decision to reduce interest rates further is the fiscal position. Nonetheless, with government committed to fiscal consolidation, the next round of rate easing to occur post Budget announcement and we expect 100-125bps cut in repo rates in CY15.

Geojit BNP Paribas Financial Services
Rajan has paved way for creating more liquidity in the system for banks to capitalize on a recovery in the cycle. Further policy actions would be data depended and probably post the budget session. On these lines, though it will be difficult to say how government uses this platform for reforms, market expects the budget to be the key in increasing corporate and household confidence to save, jobs and capex cycle revival.

Karvy Private Wealth

The reduction in SLR by 50 bps is a masterstroke by the RBI as it increases the potential credit available to be disbursed by the banks who have been vigorously demanding lower interest rates. Now banks have to keep lower balances with the government which will enable to them lend more money and thus be able to incrementally reduce their lending rates. At the same time, GoI has to ensure that there are no slip ups in the path of fiscal consolidation as lower balances are avaliable from the banking system.

While inflation declined faster than expected due to favourable base effects during June-November, the upturn in December turned out to be muted relative to projections.

Religare Institutional Research
Temporary pause on rates as RBI sticks to data-dependent approach: The central bank has kept key policy rates unchanged, in keeping with expectations given that no new developments in terms of disinflation or fiscal outlook have cropped up after the 25bps surprise rate-cut on 15 January. The RBI had last indicated that further easing would be strictly data dependent.

While the RBI would closely monitor the new CPI figures post-base revision, it has maintained its 6% inflation target by Jan’16. Fiscal slippage and an errant SW monsoon remain the key upside risks.

We expect the next repo cut post the budget, provided inflation and fiscal balances are supportive. Overall, with the RBI comfortable with 1.5-2% real interest rates, we expect aggregate cuts in the range of 75-100bps by Dec-end.

Ramesh Rachuri, Head – Fixed Income, Peerless Fund Management
RBI is now majorly data driven. There was no data between January 15th to today on major macro-economic policy. In addition, the major macro economic data numbers like GDP, and inflation have been revised with the base year being changed to 2012. This would also necessitate some deeper study, and await historical numbers with the new base to analyse the trends. The historical numbers are slated to be released on February 9th, 2015. So, RBI will study the new series and form disinflation paths of the possible future course of inflation, study new components which have become more important in the new series, and their seasonal and cyclical movements.

The economy also needs investment, for which it needs savings. India’s savings rate has fallen over the years to 30% of GDP. The years of high inflation and consequent inflationary expectations have channeled household savings into real assets – gold, and real estate. Their incentive to move to financial assets can be structured on a real interest rate regime (interest rates less CPI inflation). By RBI’s own admission, this real interest rate spread, according to various experts is between 150 bps – 200 bps. This is useful in determining the total quantum of rate cuts in the regime of dovish interest rate policy.

There is also a disinflationary process going on globally, with a fall in the price of major commodities, and slowing down of European and Chinese economies. With a lag, this will feed into India too. This might prompt the RBI to frontload the rate cuts for the current year, well before any increase in interest rates by the U.S., towards the end of the calendar year. Assuming all the factors mentioned above continue to perform favourably, we could see a 25 bps – 50 bps cut in interest rates after the budget, and before, or on the April RBI policy.

Dipen Shah, Kotak Securities
The RBI action of maintaining rates was in line with expectations. The reduction in SLR may not have any immediate impact as banks already have excess liquidity.

RBI has shifted its focus from CPI inflation to fiscal actions, as it wants Government to focus on improving long term sustainability of low inflation, beyond dis-inflation caused by global commodity price corrections. Going ahead, we believe that, RBI will closely watch the budget and the fiscal announcements before deciding on future rate cuts.

Also, government is expected to change the base year for CPI inflation from current 2010 to 2012 from January onwards which could change the trajectory of CPI inflation a bit.

We suspect that this is a temporary pause and further rate cuts are likely in April. Although, we maintain that the space of further rate cuts are limited (50-75 bps over the course of FY16).

Vikas Gupta, EVP, Arthveda Fund Management
RBI’s enhancement of the LRS limit to $250,000 is an excellent move. This signals that the country is comfortable in terms of foreign exchange reserves. Further, it also signals that we are worried about rupee being overvalued in the near term due to continuous inflows and would like to let the rupee reach its natural level which could be lower in the long-term. A lower rupee would enhance export competitiveness and also give support to the Make in India program of the Government of India.

Further, this allows Indian investors to invest significant amounts globally. An allocation by Indian investors to global developed markets, such as, US, UK, Europe and Japan is very critical since a balanced investment portfolio should have exposure to developed economies and capital markets, hard currencies, such as, Dollar, Pound, Euro and Yen.

The largest 1000 global companies are mostly listed in these markets. However, a majority of these companies sell products across the globe and not just to these markets. US and UK economies are doing quite well. Currently, people are concerned on the European and Japanese economies but we should also keep in mind that many companies in all these markets are fairly valued or significantly undervalued and this is a great time to invest.

Ideal way to invest would be to allocate to a “global balanced fund” which would allocate across these four developed markets in a manner proportional to the importance of these markets in the global system. Our analysis shows that such an addition to an Indian investor’s portfolio makes it quite robust against any shocks or risks to the Indian economy, currency and capital markets. The rupee returns for Indian investors from global markets are similar to what they earn in the Indian markets in the long-term. This is due to the depreciation of the rupee by 4-6% p.a. on a long term basis.

So despite the “higher growth” of the Indian economy investors are able to make money in foreign markets due to the depreciating Indian rupee. Due to “Make in India” it is expected that a lower rupee will make India more competitive in the long run. Further, the global market companies are much larger and stable.

Admisi Forex India
We believe that this could some room to banks to increase lending to productive sectors to support growth and investment in the country. We, however, believe that the central bank could take further steps after the Union Budget is presented on February 28.

Abhishek Kapoor, Partner, Neumec Group

The real estate sector was looking forward for this announcement wherein the repo rate could have been further reduced resulting into higher demand for housing stock. We welcome the cut in SLR by 50 basis points which will bring in more liquidity in the market and thus would also offer a demand-push for the affordable housing sector. There is a great need to lower the cost of EMIs so that more people enter the market to buy and invest in housing which would give a fillip to the industry. With inflation under control, we are confident that the central bank would look at rate reduction in the coming weeks.

Mihir Vora- Chief Investment Officer, Max Life Insurance

The RBI non-action on rates in this meeting was on expected lines- we did not expect the RBI to take further action so soon after the last cut in January.

The key factors that seem to be dwelling in the mind of the policy-makers are 1) inflation and inflation expectations 2) quality of fiscal deficit improvement and 3) the hot-money flows to markets like India in a loose global monetary environment especially in Europe and Japan

We believe that further action by the RBI should only be expected after the Budget and the path that the Finance Minister takes towards fiscal improvement will be an important variable in the RBI’s view formation. They also are cognizant of the large flows into the Indian debt markets. To discourage hot-money the minimum maturity of the instruments that Foreign Portfolio Investors can buy has been raised to 3 years.

We continue to be bullish on Indian Government and Corporate bonds and continue to expect a further 75 basis points rate cut during financial year ending March 2016.

Nirakar Pradhan, Chief Investment Officer, Future Generali

After a 25 bps cut in repo rate 2 weeks ago, the Reserve Bank of India (RBI) has expectedly maintained status quo on the repo rate while cutting SLR by 50 bps to 21.5%. It maintains that any further easing would depend on the data that confirms a disinflationary glide path and high quality fiscal consolidation.

If inflation trajectory remains benign and the Government sticks to its fiscal deficit targets, there is a strong chance of further rate cuts by RBI. With positive domestic macroeconomic developments and RBI’s stance clearly turning towards easing of liquidity and policy rates, both equity and debt markets are likely to benefit in the year ahead.


Ajay S Shriram, President, CII
A modest 25 bps cut would have further lifted sentiments and assured the markets that the monetary easing cycle is on course which would be followed by further cuts in rates during the course of the year.

CII however welcomes the lowering of the statutory liquidity ratio by 50 bps which, by easing liquidity in the system, would ensure that funds would be available to the banking sector for onward lending. This in turn would provide a fillip investment and growth Mr Shriram stated that with the recent change in inflation dynamics, particularly the steep slide of global oil and commodity prices and current account deficit under control, there is enough space to maneuver policy in favor of growth. CII is hopeful that the RBI would resume its accomodative monetary policy stance in the next policy review and work in tandem with the government to bring the investment momentum back to the economy. CII is looking to see a 100 bps reduction in headline rates in the course of the year.

V S Parthasarathy, CFO, Mahindra & Mahindra
As an Industry player, given the current stress and need for stimulus, a rate cut would have been welcomed by us. A monetary push would have helped growth.

After having focused on the health Drivers (like fiscal consolidation, current account position , Inflation trajectory) it could be argued that the RBI should now focus on growth drivers. The RBI Governor began the action on Jan 15, and a continuation of this action would have been a tail wind for growth & demand.

The RBI had its finger on the button, but chose pause, we had expected them to go for another cut. However having said so, we do appreciate that the RBI has shown consistency in the stand they had taken to avoid flip-flop.

Dr. Jyotsna Suri, President, FICCI
Following a cut in the repo rate introduced last month, RBI has today introduced a cut in the SLR rate by 50 basis points. This is a clear indication to the banking sector to make liquidity and funds available for productive purposes such as investments to spur growth. With the government on one hand easing hurdles that have stalled large projects and RBI taking measures to direct more liquidity towards productive purposes, we hope that growth will get a boost going ahead.

Although a repo rate cut today would have perked up sentiments, we do understand that the RBI is clearly now looking at the fiscal consolidation measures that would be announced in the upcoming budget. Given that the government is committed to maintaining fiscal prudence, we are hopeful that the repo rate cut cycle would be resumed after the presentation of the Union Budget for 2015-16. We see the need for a cut of at least another 75 basis points during 2015 and its effective transmission by the banks to industry in the form of lower lending rates to boost growth on a sustainable basis.

Brotin Banerjee, MD and CEO Tata Housing
A further cut in rates would have been a definite positive for the industry but with a 25 basis point cut in CRR a fortnight ago, we weren’t expecting a further reduction this time. With the improving outlook for business, we can only hope that measures taken in the budget can addresses liquidity issues faced by the industry. There is scope for further rate cuts and we hope that the RBI will take a call on this in near future.

Mohit Goel, CEO, Omaxe

The last round of rate cut in mid-January didn’t quite translate into lower interest rate by banks. While we expected RBI to initiate another round of cut before the Budget to give fillip to investment and demand, the 50 bps SLR cut at this point in time may not have the kind of impact that will give impetus to the economy and more so demand for housing.

Banks may be prodded to lend more with this cut but high lending rate is an impediment that has dissuaded borrowers. The home loan growth and corporate credit demand both have been slow and it’s time the Reserve Bank goes aggressive with rate cuts and impress upon banks to reduce lending rate in equal measure.

Shailesh Puranik, Managing Director, Puranik Builders
The RBI’s move to keep the rates unchanged was expected as the Central bank had last month announced an off policy rate cut. RBI has announced a cut in the SLR by 50 basis points this time and it will help in improving the liquidity in the market.  Although the RBI move may not help directly to the real estate, it would strengthen the overall market sentiment.