RBI Surpassed Market Expectations: Experts On Surprise 0.75% Rate Cut

The Reserve Bank of India (RBI) slashed interest rates on Friday, following other central banks, in an emergency move to counter the economic fallout from a fast-spreading coronavirus.

The RBI said it was maintaining its "accommodative" stance, and would keep its position "as long as necessary" to revive growth, while ensuring inflation remained within target.

The bank's six-member monetary policy committee cut the repo rate by 75 basis points (bps) to 4.40 per cent, in line with expectations. The reverse repo rate was reduced 90 bps to 4 per cent.

Here is what experts make of the RBI's surprise rate cut:

Upasna Bhardwaj, senior economist, Kotak Mahindra Bank, Mumbai

"The RBI, very correctly so, announced a comprehensive bazooka covering all aspects of the economy by taking system-wide measures both through liquidity, rates and regulatory forbearance (retail as well as for industry), and also targeted measures to manage the corporate bond markets.

"The measures should help in tiding through the end of the year issues, which many banks and institutions were fearing, and will go a long way in cushioning the dislocations in various markets.

"We expect additional scope for 40-50 basis points (bps) of rate cut with any further easing and extension of measures depending on the nature of the spread of COVID-19."

Sujan Hajra, chief economist, Anand Rathi Securities, Mumbai

"These are extraordinary measures that have come under an extraordinary situation and what was required at this point of time.

"There are some positives as well as negatives for banks. They will be pressurised to transfer the cuts, also forced to increase lending. Also, after 90 days of moratorium there can be an increase in non-performing assets. All these concerns are also being factored in by the markets.

"But, for the overall industry this is a positive thing. This would not necessarily promote growth but avert a collapse, boost sentiments, which is a big positive."

Abheek Barua, chief economist, HDFC Bank, New Delhi

"In many ways the RBI's measures went beyond the market's expectation, particularly the magnitude of the policy rate cut and the CRR reduction.

"The fact that unlike the ECB or the Fed, the RBI did not announce direct purchases of corporate bonds, leaving it to the banks instead, could be bothering markets. Besides there are no sectoral facilities for the worst hit like aviation, hospitality etc."

Aditi Nayar, principal economist, ICRA, Gurugram

"The combination of moratoriums, liquidity enhancing measures and the sharper-than-hoped-for repo rate cut will help to assuage the markets in these increasingly unsettled times, and offer some protection against widespread defaults, even though the actual impact on boosting economic activity may be limited.

"Regardless of the measures announced now by the RBI, we are lowering our base case scenario for GDP growth to -4.5 per cent for Q1 FY2021 and to 2.0 per cent for FY2021, in light of the rapidly growing uncertainties over the duration of the impact of the coronavirus on economic activity in India and the rest of the world."

Rupa Rege Nitsure, chief economist, L&T Financial Holdings, Mumbai

"This is certainly positive for the yield curve and the March-quarter results of financial entities. But we also need to remember that currently demand for credit is too weak because of the economy-wide shutdown.

"Hence, the RBI will be required to act aggressively later also when demand would start reviving. A refinance window for mutual funds is also a need of the hour, but there is no announcement to that effect."

Radhika Rao, economist, DBS Bank, Singapore

"The central bank pulled all the stops, delivering an aggressive rate cut magnified by widening the liquidity adjustment facility corridor and cash reserve ratio (CRR) reduction.

"Other notable measures included providing moratorium on loans, deferment in interest payments, liquidity push through the CRR and minimum CRR changes and in totality lowering cost of funds while lowering incremental capital burden on banks."

"Markets cheered the steps, demonstrated by the sharp correction in 10 year GSec yields and rupee gains. These moves provide the right tailwind for the economy once the lockdown is complete. More bond purchases are likely as the fiscal strain on the government becomes clearer."

Kunal Kundu, India economist, Societe Generale, Bengaluru

"We think an emergency situation deserved emergency response and the RBI did the right thing by bringing forward its rate decision by a week when central banks all over the world are taking proactive measures.

"What is comforting though (and not unexpected) is the assurance that the RBI is open to all conventional and non-conventional monetary policy action, if required, especially if COVID-19 challenge persists longer."

Rahul Bajoria, chief India economist, Barclays, Mumbai

"The RBI surpassed expectations by delivering more than what the market had anticipated, and its promise to 'do whatever it takes' has come good. The steps to ease working capital pain, reduce liquidity costs and provide moratorium on term loans will alleviate stress across various sectors. We continue to see rates dropping to 3.50 per cent by August 2020."

Prithviraj Srinivas, chief economist, Axis Capital, Mumbai

"The RBI has pulled out its bazooka. It has pulled down the cost of capital through deep policy rate cuts, it has increased the quantity of money through CRR cuts and asset purchases, and more importantly reduced financial stress in the economy through its 3-month moratorium on all term loans as well as working capital.

"We think the additional liquidity and the reduction in financial stress will be immediately felt by the economy, while lower cost of capital will provide the necessary tailwind as we get out of the crisis."