RBI decision to keep repo rate unchanged leaves economists puzzled

To maintain a balance between growth-boosting measures and inflationary pressure, the Reserve Bank of India on Thursday kept key lending rates unchanged. The central bank's monetary policy committee (MPC) in its fifth review of the current fiscal kept the repo, or short term lending rate for commercial banks, at 5.15 percent.

The reverse repo rate was maintained at 4.90 percent, and the marginal standing facility (MSF) rate and the bank rate remained at 5.40 percent.

Speaking to CNBC-TV18, many economists have expressed their surprise over the central bank's decision, while some see it as a temporary pause because inflation has gone up.

“I cannot remember the last time there has been such a resounding surprise as far as the RBI decision is concerned. It defies the expectation of the market and also the body language of the central bank over the last six months or so when they seemed amenable towards out-of-the-box thinking and being very proactive in terms of putting growth. So I will restrict my comment to saying that, yes, after a very long time the RBI has truly surprised me,” Taimur Baig, Managing Director and Chief Economist at DBS Group Research, said.

Niranjan Rajadhyaksha, research director and senior fellow at IDFC Institute, is also puzzled by the apex bank's move.  "The main signal I got from his press conference right now is that 'have patience, that we cannot cut rates mechanically'. I am still a little puzzled by the decision because usually, the RBI says look at the forward inflation forecast as the intermediate policy target and monetary policy in India works with a lag of about 2-3 quarters. But if you look at three quarters ahead, they are expecting inflation to be back in the safe zone of around 4 percent. So why they wouldn’t cut right now is still not clear to me," he noted. 

“We have a terminal repo rate of 4.5. We do not see any reason to change that. This is a temporary pause because inflation has gone up close to 4.6 in October, it might go up to 5.3 in November but the RBI has already given 135 bps and back-to-back 5 policies. I think there would be more rate cuts coming in 2020, about 50-60 bps from here as inflation starts coming down towards 4 percent by April-June,” Kaushik Das, Chief Economist at Deutsche Bank noted.

For Neeraj Gambhir, President  & Head - Treasury and Mkts, Axis Bank, the RBI's decision came as a 'negative surprise'.  "We were all expecting at least 25 basis points and some part of the market were actually expecting higher than that given the weakness in the growth and given the forward forecast around the growth that the market was putting around. What is surprising is the fact that why Reserve Bank has quite substantially toned-down the forecast on growth. They have chosen to wait and watch. That kind of led me to believe that their view around inflation is not that sanguine. They probably feel that this food inflation episode could play out longer than what the market thinks or they could be other factors that play here that they need to watch out for. I feel that the bar for a cut now is probably somewhat higher than what it was prior to this policy. So the market will have to look at the data very closely, look at what happens in the budget very closely not just for this year but also for next year," Gambhir said.

“The fact is that transmission has not happened and it always happens with lag. So we still believe that the normal marginal cost of funds based lending rate (MCLR) is likely to come down because the growth is not there. Year-on-year (YoY) growth is there, but in this year the growth is not there and credit is simply not picking up. Of course, what has happened is the cost of term deposit has not come down, but we believe that since it is with the lag the previous cuts will still keep the momentum. We believe that MCLRs can come down further and if MCLR comes down, maybe banks will like to reduce their spread. Because of the liquidity the market linked bonds, their rates are coming down and there is a direct competition to loans to that,” Kamal K Mahajan, Head of Treasury and Global Markets at Bank of Baroda,  observed.

“The decision to maintain repo rate at 5.15 is a good thing. The reason is 135 basis points (bps) cut during the current year will take some time to transmit properly into credit growth. There is also one more point like demand not being there. So all these things will settle down instead of again changing. Probably, the RBI has done a good thing to continue the rate. The next time when they come, there could be some rate cut by the end of the financial year," SS Mallikarjuna Rao, MD and CEO of Punjab National Bank, pointed out.

Said Dinesh Kumar Khara, MD-Global Banking and Subsidiaries, SBI: "Regarding lending rate cut, it will be the function to be carried out by the Asset Liability Committee and we do go through various data points and then take a call. Much of it will depend upon demand and we are actually seeing demand on the retail side which we are supporting. So that is not a challenge but as far as corporates are concerned, we do see some concerns and a part of it is coming from the fact that some of the corporates are going for deleveraging. So that’s one of the reasons why perhaps we do not see much of demand from the corporates.”

"It is quite interesting of course that the RBI points to weak growth and then doesn’t do anything in terms of rates. But usually, in a weak growth environment, we should have seen flattening of the yield curve. That is something we have not seen in the last few months primarily on account of the worries about the fiscal and the public sector borrowing. I don’t think those worries are going away and I think there are concerns that you might see some slippage in the fiscal this year and potentially in the medium term. So the budget becomes very important in that perspective," R Sivakumar, HD-Fixed Income, Axis Mutual Fund opined.