RBI repo rate up 25 bps, policy stance neutral: How D-Street read the money policy

  • 6th Jun, 2018

The Reserve Bank of India (RBI) on Wednesday hiked its policy repo rate, or the short-term lending rate, by 25 basis points to 6.25 per cent. However, in a surprise for the financial markets, the central bank maintained its stance as neutral, which Governor Urijit Patel explained as a signal that the central bank has kept its options open.

This was RBI’s first rate hike by the central bank in four-and-a -half years, and first under the Modi government. The reverse repo rate has been adjusted to 6 per cent, while the CRR remained unchanged at 4 per cent. The RBI allowed 2 per cent more SLR (statutory liquidity ratio) carve out to mee

The domestic stock market appeared to cheer the RBI move, with the BSE Sensex jumping 276 points after the money policy announcement.

Here is how economists and Dalal Street biggies decoded the money policy for the readers of MoneyGuruIndia.com.

Motilal Oswal, Chairman & MD- MOFSL
RBI Governor changed the rate little higher, as at this juncture that was the best thing to do. India is in a situation where anything sharp can hurt economy. If we raise the Interest rates too fast & too sharp, and try tightening the money supply it can hurt the corporate earnings, which are just about on cusp of expanding. Lowering of interest further was not the case at all as Global volatility due to CRUDE and rate tightening never offered that option.

At current levels markets are looking little expensive but for a reason of expectation of earning momentum kicking in. We think even the mid cap correction is overdone and selectively mid-caps should start stabilizing. It would be a good idea to commit some capital into well managed mid cap mutual funds as the recovery in earnings will bring the quick buoyancy. Broad markets are currently holding well and we think have a case to move higher towards 11k Nifty mark in short term.

Abheek Barua, HDFC Bank
Sensible and cautious response to the risks that have unfolded since the last meeting. This is not likely to be end of the hike cycle as domestic price risks such as MSP hikes and firm global commodity prices would warrant further monetary action.

Sonal Varma, Nomura
The RBI’s decision to maintain a “neutral” stance suggests that it does not want to signal that it is embarking on a tightening cycle and that it remains data dependent. We believe that both growth and inflation are likely to head higher in the coming months, paving the way for another 25bp rate hike in August. However, the ongoing tightening of financial conditions, higher oil prices and political uncertainty are likely to slow economic activity after September, in our view. Hence, we expect a pause thereafter. Global factors (oil prices, capital flows) are the main risks to this view

Dhananjay Sinha, Emkay Global Financial Services
RBI catches up with the market with a 25bp hike; a precursor to a tightening rate cycle. The announcement of 25bp rate hike by RBI today broadly encompasses considerations of upside revision in inflation trajectory going ahead, impact of rising commodity prices and rising global yields, led by tightening of US dollar liquidity.

With this hike the RBI has finally reversed the 25bp cut it initiated in Aug’17, while retaining neutral stance, in the aftermath of demonetisation and impact of GST implementation, which led to surplus liquidity condition. Even With this rate hike the stance is still not of tightening. In our view, this rate hike could lead to a tightening stance if the inflation risks accentuate along with currency depreciation.

In our view, before today’s hike, the RBI was already behind the curve as the GSec yield curve, money market curve and implied forward rates from the currency market had been pricing in more than 50bp hike. Clearly, the risk to rate sensitive sectors, banking NBFC, reality, cap goods, have materialized as expected. We believe as the expectations on future hikes materialize, these risks can become more relevant. The key thing to watch is whether growth recovers strong enough to compensate for rising rates. We maintain our view that fair value for 10 year GSec is at 8.4%”

VK Sharma, HDFC Securities
The RBI decision to hike rates is a step in the right direction. The policy is hawkish on inflation but we like the confidence shown in the economy growth. Despite inflationary pressures RBI has stuck to its growth projections and guided for robust investment activities for FY19. Despite the hike, the stance is still neutral , which is good. This puts RBI ahead of the curve

Anita Gandhi, Arihant Capital Markets
The six-member MPC committee of RBI raised interest rates by 0.25 bps for the first time in 4.5 years in BJP led NDA govt, keeping CRR & SLR status co. Recent hike in crude prices & better GDP for last quarter of FY 18 suggest inflation trajectory may be on the higher side. Though, this may put some pressure on borrowers, it is positive news for the savers in the economy.

Arvind Chari, Quantum Advisors
The 25 bps rate hike by the RBI, the first in four and a half years, should be seen as a reversal in the cycle. Bond markets have already priced a 50 bps rate hike and thus we do not see much impact on bond yields from this rate hike. The risk we see is from the stance of the policy, the RBI has retained stance at neutral which keeps it data dependent. We believe, if CPI trends towards 5.0% the stance may be changed to tightening which then brings in market uncertainty on whether this will be a larger rate hiking cycle of 75-100 bps.

We differ with RBI on their assessment of liquidity. Weighted average call rates (decided by the banks) cannot be the only parameter of judging liquidity conditions. Money market rates which is reflective of the entire bond market participation is signaling tighter conditions and asymmetric liquidity situation.

Sampath Reddy, Bajaj Allianz Life Insurance
RBI hiked rates by 25 bps (with all MPC members voting for  hike), although it maintained its policy stance at ‘Neutral’. CPI Inflation forecast was revised marginally upwards by around 15 bps to 4.8% in FY19—with risks to the upside, although the positive point was that GDP growth forecast for FY19 was maintained at 7.4%, with risks evenly balanced.

With RBI keeping its policy stance unchanged at ‘neutral’, we feel that future rate action and policy stance will continue to be data dependent, and especially track the course of inflation & oil price trajectory, and global monetary policy events. We continue to prefer the shorter end of the yield curve at this juncture.”

Lakshmi Iyer, Kotak Mutual Fund
The MPC voted unanimously for a rate hike, though maintaining the stance of the policy in neutral gear. The CPI ranges have been revised upward, which also suggests the key reasons, among others for rate hike. While the rate hike was a largely discounted event, the increase from 11% to 13% SLR for LCR purposes, comes a potential demand deterrent for g-secs.

With no great triggers for yields to ease, we could expect long bond yields to remain at elevated levels. Short end may get respite to reduced LCR related issuances, so we could expect some easing at shorter end of the yield curve. Prudence demands to stay at short end of the yield curve and continue to favour accruals over duration.

Suvodeep Rakshit, Kotak Institutional Equities
RBI MPC hiked repo rate by 25 bps to 6.25% while keeping the stance unchanged at “neutral”. We remain confident that this will be a shallow rate hike cycle if the present conditions do not deteriorate significantly.

We expect the RBI to hike by another 25 bps in the August policy but the call will hinge on how crude and INR movements pan out over the next few months, as well as, the extent of MSP hikes. We need to carefully look at the RBI minutes and observe the extent of upward pressure on food prices in the near term, risks of fiscal slippages, domestic growth recovery, and evolving global macro conditions (trade wars, DM monetary policy cycle, and commodity prices) to have greater clarity on the extent of RBI’s rate hike cycle.

Avnish Jain, Canara Robeco Mutual Fund
Against general market consensus of pause in rates, the Monetary Policy Committee (MPC) unanimously agreed to hike repo rate by 25bps, though they kept the stance as “neutral”, giving some relief to the market. The MPC noted that while inflation in recent past has evolved according to RBI projections, the sharp rise in crude prices coupled with general increase in global commodity prices, uncertainty on impact of MSP increase may lead to higher inflation, though expectations of good monsoon should keep food inflation benign.

Accordingly the inflation forecast for 2HFY2019 was increased to 4.7% from 4.4%. Further the MPC noted that growth prospects were improving with better capacity utilisations, increasing credit offtake and acceleration in investment activity. With the MPC stance at neutral, the committee is likely to be continue to be driven by incoming data especially impact of MSP increase, progress of monsoons and crude price movement.”

Dheeraj Singh, Taurus Mutual Fund
The monetary policy committee (MPC) of RBI hiked the policy interest rate (the policy repo rate) by 0.25%. With this increase the repo rate stands at 6.25%. Correspondingly the reverse repo rate stands at 6.00%.

The monetary policy stance has however been retained as neutral. All six members of the committee voted for the rate hike. The RBI decision seems to have primarily been driven by the increase in the recent inflation prints, especially core inflation (inflation excluding food and fuel prices). The recent increase in international crude prices also meant that RBI has increased its projected inflation for the remainder of the fiscal year. CPI inflation (excluding the impact of HRA revisions) is projected at 4.6% for the first half of the fiscal year and 4.7% for the second half of the year. GDP growth estimates for FY19 has however been maintained at 7.4%.

Dinesh Rohira, 5nance.com
The monetary policy committee headed by RBI Governor in its second bimonthly meet hiked the repo rate by 25 bps from 6 per cent to 6.25 per cent along with rise in reverse rate to 6 per cent from 5.75 per cent. However, despite a rate hike it continued to maintain a neutral stance over medium term inflation target at 4 per cent within a band of 2 per cent upside or downside, and forecast GDP growth in the range of 7.5-7.6 per cent.

The rise in core inflation rate along with weakening of rupee in recent period, and macro headwinds were the likely attributes for the current rate hike although it was anticipated in next meet. The recent trend however indicated a market already discounting the probable of rate hike by 25 basis points which is seen with upward movement in government bond yields, and substantial rise in corporate borrowing rate in recent period. In tandem with 25 bps rate hike, it is unlikely to cause major setback for the consumption driven economy by current hike.

Although the cost of borrowings will marginally increase which is already factored in, consumer can also further expect a marginal revision on subdue deposit rates. Currently, consumers are at front end of growth trajectory over a soften industrial activity, and thus revision on other liquidity tools will act as impetus for the domestic economy which is beckon on consumption theme. Even if RBI exercise a further rate hike in current financial year, it is likely to consider consumer’s sentiment and growth trajectory to channel fair tradeoff for the end consumer through other liquidity tools.

Somnath Mukherjee, ASK Wealth Advisors
The first rate hike since 2014 was on expected lines – most of the market expected RBI to raise rates, even though a large number of participants hoped that they would be kept on hold this time, preparing the ground for a hike in the next policy. Much ado about nothing really, as macro fundamentals tend to trump minutiae of policy timings. In that sense, RBI has merely done what the broader macro was dictating. Expectedly, it has flagged off higher risks on inflation – with 4.8 and 4.9% for the first two quarters and 4.7% for the second half of the year. With an Inflation target of 4%, that gives as good an indication as any on the RBI policy stance going forward as well. Additionally, governor also talked about closing output gap and investment picking up – in other words, RBI doesn’t think the economy needs a monetary policy boost now.

All in all, there was more meat in the “non-policy” parts of the statement (on priority sector treatment of housing loans, valuation of SDL by banks etc) than on the policy front, which was largely what the macro environment is dictating. Expect Indian yields to remain elevated, with an upward bias.

Source : Money Guru India

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