"Monetary Policy Continues To Stay Dovish": Economists As RBI Holds Rates

The Reserve Bank of India (RBI) left key interest rates unchanged on Friday as widely expected, while retaining an accommodative monetary policy stance to support the coronavirus-hit economy. The RBI sees India's real GDP contracting by 9.5 per cent in the ongoing fiscal year, and economic growth only turning positive in the final January-March quarter, Governor Shaktikanta Das said in a webcast after a meeting of the monetary policy committee (MPC). The MPC, as expected, kept the repo rate, its key lending rate, at 4.0 per cent, while the reverse repo rate or the key borrowing rate stayed at 3.35 per cent. The central bank has slashed the repo rate by 115 basis points (bps) since late March.

JOSEPH THOMAS, HEAD OF RESEARCH, EMKAY WEALTH MANAGEMENT, MUMBAI
"The RBI policy is on expected lines, as it keeps the base rate unchanged and the policy stance accommodative. The probability of RBI cutting rates in the near future remains quite low in view of the higher inflationary pressures."

"RBI views the current spike in prices a "transient hump", as price level may moderate in Q4. But with a huge government borrowing programme ahead, the RBI will continue with the liquidity support. It is actually the liquidity that has been helping both the debt and the equity markets. There is always a constituency of market participants who want rate cuts. They will be certainly disappointed."

"The reports which had come up last June that the rate cut cycle is coming to an end may gain more prominence now. In our view, it is not the rate cuts but the liquidity provision that matters today, when the market rates on short term bank and corporate papers have touched low single digits."

"The positioning of portfolios should continue on the same lines with an accent on the short and mid sector. The expected GDP contraction for FY21 is placed at 9.50%, which is also quite close to most of the market estimates, with the Q4 number must likely turning positive number."

ANAGHA DEODHAR, ECONOMIST, ICICI SECURITIES, MUMBAI

"The unanimous vote to keep repo rate unchanged is in line with our expectations. However, the RBI again used a lot of tools outside the purview of MPC to provide strong support to the economy.

"We expect 'on tap TLTRO' to improve access and lower cost of credit for targeted sectors. Similarly, rationalisation of risk weighs on housing loans could support the troubled real estate sector.

"However, the biggest positive announcement for me in this policy is OMOs for state development loans. This could keep a lid on spreads on SDLs, thereby, providing support to states finances when they are in dire need."

SHILAN SHAH, SENIOR INDIA ECONOMIST, CAPITAL ECONOMICS, SINGAPORE

"The main reason for inaction was the stickiness of inflation. We think that inflation will drop sharply over the coming months as food inflation eases and the collapse in demand eventually offsets supply constraints - a view also shared by the RBI.

"Linked to this, the outlook for economic growth is bleak. New COVID-19 cases in India have dropped over the past couple of weeks but remain, by far, the highest in the world. Containment measures will need to stay in place for a long time yet. The RBI itself thinks the economy will contract by 9.5% this fiscal year. All of this augurs for further policy loosening.

"We think there is scope for another 50bp of rate cuts, which is a more dovish view than currently discounted in financial markets."

VEENA SIVARAMAKRISHNAN, PARTNER, SHARDUL AMARCHAND MANGALDAS & CO, MUMBAI

"For the first time since COVID-19, the governor's statement has a sense of tides turning. While the real impact is yet to be seen, the "on tap" TLTRO and easing of contraction in certain sectors seem to indicate 'winds of change'.

"The RBI has (been) proactive in meeting the demands of the economy. While the interest moratorium saga continues to play out in the courts, the continuing relief by the RBI will certainly ease short-term liquidity pressures."

PRITHVIRAJ SRINIVAS, CHIEF ECONOMIST, AXIS CAPITAL, MUMBAI

"The RBI has provided liquidity assurance to banks and bond markets, and most crucially, a benign assessment of inflation outlook. The central bank expects price pressures created by supply-side issues to dissipate as supply chains are restored.

"In addition, comfortable outlook about food supply gives the RBI confidence to look through current high inflation and continue with an accommodative stance. This is a status quo policy with a dovish tilt, which should assuage markets and put a lid on upside risks to market interest rates."

SHASHANK MENDIRATTA, ECONOMIST, IBM, NEW DELHI

"Today's decision to hold the rates was widely expected given that the inflation has been above tolerance level for several months. However, the MPC highlighted that factors driving inflation are largely transitory and as such should dissipate gradually."

"While rate setting was unchanged, the central bank also emphasised policy support in other ways such as liquidity support for financial markets, regulatory measures to augment flow of credit, etc."

"Overall, the tone of the policy was dovish, and we expect central bank to easy policy rates in Q4FY21."

SAKSHI GUPTA, SENIOR ECONOMIST, HDFC BANK, GURUGRAM

"The RBI kept its policy rate unchanged at 4%, however, the tone was significantly dovish. This implies there is room for further rate cuts (possibly 50bps) once inflation cools off. This would be justified by the sharp contraction in growth this year and the expected moderation in inflation going into Q4 FY21.

"We expect growth to contract by 10% in FY21 and inflation to ease to 4.5% by December and 3.5-4% by March 2021.

"More importantly, the RBI announced a number of measures such as open market operations (OMOs) for state development loans (SDLs) to provide liquidity and keep risk-free rates contained."

LINCOLN BENNET RODRIGUES, CHAIRMAN, BENNET & BERNARD GROUP, GOA

"Any further rate cut at this point of time would have definitely added to the positive sentiment. However, at the same time, it is imperative for banks to reduce lending rates as this is the need of the hour to further see a boost in the real estate sector."

KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU

"An inflation rate way beyond the upper range of the central bank's tolerance range clearly meant that the RBI was in no position to provide additional monetary policy stimulus through the rate cut channel to help the economy that is facing its worst contraction ever.

"Not surprisingly though, the RBI has maintained an accommodative stance implying that rate cut would be around the corner at the slightest hint of inflation coming under control.

"Not only has the headline CPI data got skewed because of the imputed values for March and April, but the trajectory of both the WPI and the GDP deflator moving in a direction virtually opposite to that of retail inflation underscores the data anomaly.

"We continue to expect an additional 50bp rate cut by the RBI though the timing remains a bit iffy."

SUMAN CHOWDHURY, CHIEF ANALYTICAL OFFICER, ACUITE RATINGS & RESEARCH LTD, MUMBAI

"In the context of increased concerns on higher bond yields and higher government borrowings, the RBI has given out a strong message that it will manage yields in an aggressive manner through larger OMOs which will also cover SDLs. This along with an expectation of a moderation in inflation over the next few months, is expected to keep 10-year government security yields at sub-6% levels and also facilitate higher borrowings by the states in the near term."

"Additionally, several regulatory measures such as tweaks on risk weights for home loans with higher equity contribution, increase of exposure limits to individual retail and small business loans and extension of co-origination models to cover all NBFCs and HFCs will help to incentivise higher lending to retail and SME sectors, thereby pushing the currently low credit growth."

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI

"The rate decision was mostly on expected lines as inflation is still very high. Inflation is expected to ease substantially in December. The Reserve Bank of India is expected to cut rates either in the next policy meet or the one after that. RBI is not done with rate cuts as yet. Up to another 50 basis points cut is likely during the current cyle."

RUPA REGE NITSURE, GROUP CHIEF ECONOMIST, L&T FINANCIAL HOLDINGS, MUMBAI

"Policy continues to stay dovish even as the overall mood has changed from COVID-19 containment to revival."

"By giving macroeconomic projections, the MPC has set the context of future policy moves. More transparency on open market operations (OMO), inclusion of state bonds in OMOs and extension of HTM limits will aid the absorption of large sized government market borrowings programme."

"The new MPC team appears to be on the same page."

AMIT SHAH, HEAD OF INDIA RESEARCH, BNP PARIBAS, MUMBAI

"Overall, we see the MPC action as in-line with positive commentary, especially the on tap TLTRO which would ensure enhanced liquidity."

"We think the RBI has been very prudent thus far in the way they have handled the economic contraction with first starting with providing moratorium and then selective restructuring of loans and easing monetary stance when it was needed."

"I think the RBI had expected that India's battle with COVID-19 would be a long drawn one and hence they have been selective in using monetary policy as a tool so that they have some buffer that they can use in the event there a strong second or third wave in India."