While some thanked RBI governor Raghuram Rajan for a "diwali gift", Rajan said debunked the school of thought and said that the steep cut in repo rate was on the back on actual progress on the ground.
The Reserve Bank of India cut the key repo rate by 50bps, in an unexpected move, giving the industry a reason to cheer. Most brokerages, bankers and persons from the government had called for a 25bps rate cut on the basis of inflation levels at historic lows.
While some thanked RBI governor Raghuram Rajan for a "diwali gift", Rajan said debunked the school of thought and said that the steep cut in repo rate was on the back on actual progress on the ground. He has also urged banks to pass on the benefit of a cumulative 1.25% rate cut actualized by the central bank.
Here are some reactions to the rate cut policy announced on Tuesday
Debopam Chaudhuri, Chief Economist, ZyFin Research :
“Today’s credit policy review outcome was greatly in line with the needs of the economy under present situations. Also, the policy guidance provided for the next two and a half years would lend some directionality to the Indian economic growth trajectory. Guided by data on consumer sentiment so far this year, consumer demand during this festive season is expected to grow especially after today’s decision on rates and RBI’s focus on strengthening the monetary transmission mechanism. Sales data on vehicles, durables and homes is expected to be better during this festive period compared to last three years, with recovering consumer sentiment.”
Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mutual Fund
We at Kotak AMC had expected a 50 bps rate cut for the remainder quarter of the year. Yet, the alacrity and the swiftness of the policy response by RBI has positively surprised the market. The inflation pressure is declining and the long term inflation trajectory is on the downward slope as supply bottlenecks continue to open up. This creates an enabling environment for a more accommodative policy stance in future. Moreover, with global economy increasingly seeing India as a lucrative growth spot, it will be incumbent on the government and the central banker to work in tandem to further boost opportunities. We believe that equities with two-three year timeframe, and duration funds with 1 year plus timeframe are may provide competitive return for the investor.”
Mihir Vora, Director & Chief Investment Officer, Max Life Insurance
The RBI has delivered a pleasant surprise by a 50 basis points cut in the key rate i.e. the Repo-rate from 7.25% to 6.75%, against market expectations of a 25 basis points cut.
The accommodative stance has been driven by a weak global environment, continuing slide in commodity prices and expectations of continuing sluggishness. Given the weak global environment, low domestic capacity-utilization and weak private sector capital expenditure, the imperative to aid revival in domestic demand and investments is more immediate. The RBI seems comfortable with its inflation targets for 2016 -17 (in spite of a sub-optimal monsoon) and the Government's commitment on fisal deficit targets.
Financial market-volatility after the Chinese currency devaluation has led to reversal of capital flows to many emerging markets. This uncertainty still persists. RBI has increased the headroom for foreign portfolio flows into Central and State Government debt. This can potentially result in additional inflows of $30 billion over the next couple of years, with $5 billion in the next 6 months alone. This should go a long way in reducing fears of the Indian Rupee depreciating in line with other emerging-market currencies. The Rupee has significantly out-performed other emerging market currencies and we expect this to continue.
The RBI has thus chosen to deliver front-ended action and the focus will now be on the banking system which has lagged in passing on the impact of the previous 75 basis point cuts in this calendar year.
Dr. Sunil Sinha, Principal Economist, India Ratings and Research
The rate cut by the RBI is on expected lines. RBI action is based on its belief that (i) despite CPI inflation rising over the next few months due to the reversal of base effect, it will remain well within its comfort zone, (ii) despite less than normal monsoon rainfall, risk from food inflation appears to be contained. However, the tepid global demand, soft commodity prices coupled with postponement of policy normalisation by the Fed provided RBI additional head room, and in stead of 25 bp cut it went for 50bp rate cut. Today's action by RBI shows that if conditions permit RBI's policy stance will continue to be accommodative
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