RBI Monetary Policy decision: Here's what experts have to say

The Reserve Bank of India (RBI) cut the key policy rates by 25 basis points in its sixth bi-monthly policy announced on Thursday. One basis point is a hundredth of a percentage point. With this, the repo rate stands at 6.25 percent while the reverse repo rate stands at 6 percent.

All six MPC members voted in favour of change in stance to 'neutral' from 'calibrated tightening', which was expected by most experts and economists.

For rate cut, 4-2 voted in favour. Shaktikanta Das, Ravindra Dholakia, Pami Dua, Michael Patra voted in favour of rate cut, while Chetan Ghate and Viral Acharya voted to keep the policy rate unchanged.

“Over the past two and a half days, that is during February 5, February 6 and February 7, the Monetary Policy committee (MPC) reviewed the macroeconomic and financial conditions and prospects and voted by a 4:2 majority to reduce the policy repo rate by 25 basis points (bps). The MPC also voted unanimously to shift the policy stance from calibrated tightening to neutral,” Das said.

Experts believe that more rate cuts are awaited going ahead.

If RBI has cut at this juncture, I guess they will want to think of doing more, because a 25 basis points rate cut doesn’t do much for transmission. So if they (RBI) have gone down the path of rate cuts they (RBI) would look for an opportunity in the future whenever they (RBI) can probably deliver one more rate cut and come back to the 6 percent rate, that prevailed in the previous year.

Having said that,  things will become difficult from here on because inflation will start moving up. You will have risks related to the fiscal actually getting manifested. There could be problems with rupee. I don’t know where rupee today is after the RBI policy, so all taken together it will be more difficult to deliver a rate cut if balance on things start moving on the negative side.

There has been a sharp decline in the expected inflation trajectory notwithstanding the uncertainty on oil and the uncomfortable level of the core. By focusing on the headline inflation, the central bank is giving a signal that it may be inclined to cut more.

Bringing down of inflation estimates particularly must be bullish for markets because it does open up gates for more rate cuts in future as well. I think the MPC has taken the path of least resistance. Their mandate is headline inflation and as I mentioned before, the policy is going strictly by the inflation mandate and you do have a rationale to change the stance and cut the rates.

We were of the opinion on the rate cut and two-three things. The market is still trying to digest it because the market really thought the authorities had calibrated tightening stance, so they would have had to change the stance. But if the data movement is so sharp and if you really look at it, the inflation and the headline inflation is almost half.

Second, people were looking at core inflation. Of course the target is headline but you look at the core so that it does not spike or influence the headline dramatically. If you really look at it,  we have been seeing the core and headline in a very diversion way. The core is mainly health and education, so if it goes up dramatically high, it can influence the headline inflation.

We are only half surprised by this policy move. The reason is that we were expecting a rate cut but in the April bi-monthly policy. There are four pieces of incremental information that are new in this policy. One is that the forward inflation expectations have fallen a lot. Second is that they expect the fiscal deficit target to be met. Third, they think the output gap is a little negative right now and there can be some easing and fourth is that they think the health and education inflation, the whole increase, is just a one-off factor. So that has opened up the gap.

Going forward, I think at this point, there is a possibility that there could be further easing. However, I do not think we should get too carried away because we still have a lot of fiscal uncertainties. The whole direct cash transfer train has left the station. The center has announced it, many states are announcing it and all of that can have inflationary consequences. So we have to keep all of that in mind as well.

Actually reading too much into it, I think the right thing for the RBI Governor to do was to actually make that right call and I think that is exactly what he has done.

From our perspective, there are two things to look at from what they have done this time around.

The first thing is that I think there is a recognition that structurally inflation in India is going to be fundamentally lower than what it historically has been and this is the first policy that effectively addresses that by this significant shift that they have made in their forecast.

The second thing is that we actually expect 75 basis points of cuts for the entire year. So we actually had expected 25 basis points, that has already happened. And our sense is that one will progressively see more cuts, so it is actually not out of sync in terms of what we were thinking. This is for both, in terms of recognition of where inflation structurally has moved and also in terms of the need of the economy.

We have been looking at a 50 basis point cut over this year, so we hold that projection. I think 25 basis points has come and about 25 more could be expected going forward. The way I look at it is while the next two months are not really good from a liquidity point of view in the system, I think post April the liquidity will ease and therefore the transmission of this policy rate cut may take some time depending on the liquidity situation that plays out in the next couple of months. But clearly, it is headed downward for both deposit rates and lending rates.

If the inflation trajectory does remain benign, given the very high real interest rates in the system, the fact that private capital expenditure is still very sluggish. There is room to push this forward by cutting the rates more or even twice given how the inflation trajectory pans out and not completely take growth out of the ambit of monetary policy-making.

We all expected a change in stance to 'dovish' but I do not think a lot of us expected a rate cut, a dovish stance, a substantial revision in inflation expectations and the need to support growth.