RBI cuts policy rates by 25 bps: Here's what experts have to say

Really no surprise, the rate cut was expected, the stance was expected and frankly the inflation forecast is not so much as a surprise because the first quarter of this year had undershot two months ago and the inflation is tracking 30-40 basis points below the RBI’s old forecast and that level effect continues through the year.

So, if the RBI hasn’t changed any other assumptions, you would expect to see that subsequent forecasts get marked down correspondingly. The key is going to be the neutral stance suggests that the RBI will be data dependent and I would want to see how they peg the inflation risk in coming months.

I think RBI has done the right thing by not sounding too dovish because markets are already pricing in 50 bps more rate cuts. The way I am thinking about it is that in June, they might not do anything because in July there would be a new budget after the elections.

They would want to see the fiscal numbers but when it comes to August, by that time they would know how the monsoon is panning out, how oil is panning out and they would see the budget and then in August, we have another 25 bps rate cut taking the repo rate to 5.75. So I am expecting another 25 bps in this cycle whereas markets are still pricing in another 50 bps.

The bigger problem for the bond market would be not these rate cuts, it will be the demand/supply of bonds and there the issue is that the bond market is very reliant on open market operations (OMOs) and if the liquidity turns neutral by June, which is supposed to be the case, if the RBI steps out from doing OMOs then who buys these bonds and where do the long tenure bond yields settle down after the rate cuts are all over because market will then just focus on the fiscal dynamics.

The reduction was quite an expected thing. The key thing is the transmission thing and my sense is that given the CDR ratio that we have at 78 percent which is at an all-time high, I do not think this will translate in terms of lending rate. So, I think that part from a banking sector standpoint remains. I think a reduction in the cost of fund possibly will not happen with this kind of reduction and the liquidity shortage that we have. One would have expected a more accommodative stance with respect to more regressive Open market operations (OMO) purchases, etc. that definitely has not happened. There is some Liquidity Coverage Ratio (LCR) reduction announced, but I do not think that is going to be a significant thing for the transmission mechanism.

If this particular trend of inflation continues, I think we will see more rate cuts coming through. If you are expecting your inflation to remain well below 4 percent on a sustainable basis and if it actually pans out that way based on incoming data, I think we can well expect one more rate cut coming through in June as well as long as this trajectory is mentioned. So even though the stance remains neutral the numbers indicate that the chances are more of softness.

As you would be aware that State Bank of India (SBI) has already taken a decision to link a large part of our loan portfolio to the external benchmark.

Effective May 1, all the cash credit and overdraft loans above Rs 1,00,000 and the savings bank deposit rates also above Rs 1,00,000 are going to change as per the decision taken earlier.

So, as far as SBI is concerned, we have already taken a decision. As the governor said they are going to work on looking at ways which this can be released.

I think, in terms of rates, the market will continue to expect a 25-basis-point cut. What has probably been a little bit of staller, is the fact that the stance has not been changed. If you step back, I think the last policy was quite dramatic in terms of the shift that they affected or put through.

This one is a little bit more business as usual and it is a little careful in that that the stance has been maintained where it has been. So, I say to some extent, I think the market will still expect a 25 basis points rate cut, but they will take a little bit of breather given that the RBI itself has taken a little bit of a breather on this one.