RBI policy decision highlights: MPC cuts rates by 25 bps, lowers inflation target

Expert views on RBI policy decision##Expert views on RBI policy decision

Aditya Narain, Edelweiss Securities

“From our perspective, there are two things to look at from what they have done this time around. The first thing is that 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 kind of addresses that by this significant shift that they have made in their forecast.

The second bit is that we actually expect 75 basis points of cuts for the entire year. So we actually had 25 basis points that has already happened and our sense is you are going to progressively see more cuts so it is actually not out of sync in terms of what we were thinking both in terms of recognition of where inflation structurally has moved and also in terms of the need of the economy.”

Abheek Barua, Chief Economist, HDFC Bank

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

B Prasanna, head-global markets group, ICICI Bank

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

Dharmesh Kant, Head - Retail Research, IndiaNivesh

"Rate cut of 25 basis points an Act of fine balance between maintaining real income & boosting economic growth. Benign inflation trajectory & low private capex were key enablers for rate cut good for mid & small cap companies. Double bonanza for NBFC’s low cost of funds & boost in consumption on account of low inflation/ high disposal income. What Budget 2019 missed for corporates has been largely compensated by Monetary policy change in stance to neutral will bring stability to financial environment"

RBI's rate cut decision will boost economy, says interim finance minister Piyush Goyal##RBI's rate cut decision will boost economy, says interim finance minister Piyush Goyal

RBI Governor Shaktikanta Das "passes litmus test," says RSS economic wing##RBI Governor Shaktikanta Das "passes litmus test," says RSS economic wing

The Reserve Bank of India's new governor Shaktikanta Das has "passed the litmus test" by cutting the policy rate on Thursday, a leader of the economic wing of the powerful Hindu nationalist group Rashtriya Swayamsevak Sangh, told Reuters. The rate cut will politically benefit Modi's government as it would boost economic growth and lending to small businesses, Ashwani Mahajan, co-convenor of the Swadeshi Jagran Manch, said. (Reuters)

Sensex up over 150 points, Nifty above 11,100##Sensex up over 150 points, Nifty above 11,100

At 2.07 PM, the BSE Sensex was up 165.47 points at 37,140.70, and the Nifty 50 rose 43.40 points to 11,105.85.

KVS Manian, Kotak Mahindra Bank##KVS Manian, Kotak Mahindra Bank

"We have been looking at a 50 basis point cut over this year, I mean one 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 next two months are not really good from liquidity point of view in the system. But I think post April the liquidity eases and therefore that 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, headed downward both the deposit rates and the lending rates."

Pranjul Bhandari, Chief India Economist, HSBC##Pranjul Bhandari, Chief India Economist, HSBC

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

“Going forward, I think at this point there is a possibility that there could be further easing, but 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. So while there is some space that could have opened up, we just believe that we should not get too carried away by that.”

Read: Here are the key highlights of RBI monetary policy

Read: Here's why governor Shaktikanta Das cut repo rate today

Read: RBI raises collateral-free farm loan limit to Rs 1.6 lakh

Jayesh Mehta, MD& Country Treasurer, Bank of America##Jayesh Mehta, MD& Country Treasurer, Bank of America

"We were of the opinion for the rate cut and two-three things, market is still trying to digest it because market really kind of thought you had calibrated tightening stance, so they will have to change the stance and then they will do it. But if the data movement is so sharp if you really look at it the inflation is almost half, headline inflation is almost half, so that is one part of it."

"Second is people were looking at core inflation, of course the target is headline, but you look at core so that the core does not spike up or influence the headline dramatically. Now if you really look at it we have being having core and headline in a very diversion way. The core is really consisting mainly health and education, so it really goes up dramatically high and therefore influence the headline."

RBI harmonizes risk weight guidelines for NBFCs##RBI harmonizes risk weight guidelines for NBFCs

For the purpose of risk weights, RBI has classified NBFCs into three categories

1) HFC, AFC, IFC -> Risk Weight to be assigned based on credit rating

2) Loan companies -> Risk weight of 100% irrespective of credit rating

3) Investment companies -> Risk weight of 100% irrespective of credit rating

This has now been revised as follows:

1) HFC, AFC, IFC -> No change

2) Loan companies -> Risk weight based on credit rating

3) Investment companies -> No change

Who benefits from this?

This is hugely positive for highly rated loan companies like Muthoot Finance, Muthoot Capital, Manappuram, Shriram City Union, Bajaj Finance, etc. Given the low capital adequacy of PSU Banks, they were keen to lend to highly rated HFCs and AFC due to benefit of lower risk weights. On the other hand, PSU Banks were not too keen to lend to even highly rated loan companies due to 100% risk weights.

Long term credit Rating of some loan NBFC

1) Muthoot Finance (AA) - Risk weights may reduce from 100% to 30%

2) Manappuram (AA-) - Risk weights may reduce from 100% to 30%

3) SCUF (AA) - Risk weights may reduce from 100% to 30%

4) Muthoot Capital (A) - Risk weights may reduce from 100% to 50%

Note: This is no additional benefit for HFCs or AFCs, since they were already harmonized*

Highlights of the RBI's sixth bi-monthly monetary statement for 2018-19##Highlights of the RBI's sixth bi-monthly monetary statement for 2018-19

• RBI cuts key lending rate (repo) by 0.25 pc to 6.25 pc
• Reverse repo rate cut to 6 pc, bank rate to 6.5 pc, CRR unchanged at 4 pc
• Headline inflation estimates revised down to 2.8 pc in March quarter, 3.2-3.4 pc in first half of next fiscal and 3.9 pc in Q3 of FY'20
• Projects GDP growth to accelerate to 7.4 pc next fiscal, from 7.2 pc in 2018-19
• Pegs April-September growth in range of 7.2-7.4 pc, and 7.5 pc in Q3 of 2019-20
• Oil price outlook hazy, trade tensions to weigh on global growth prospects
• Union budget proposals to boost demand by raising disposable incomes
• To revise definition of bulk deposits as single rupee deposits of Rs 2 crore and above from Rs 1 crore currently
• To issue guidelines to harmonise major categories of NBFCs
• Proposes to set up a task force on Offshore Rupee Markets  to ensure Rupee value stability
• Removes restrictions on Foreign Portfolio Investors investing in corporate debt market
• To come out with discussion paper on Payment Gateway Service Providers and Payment Aggregators
• Hikes limit of collateral-free agricultural loans to Rs 1.6 lakh from Rs 1 lakh, to help small and marginal farmers
• Constitutes Working Group to review agricultural credit
• Monetary policy committee votes 4:2 in favour of rate cut, unanimous on change in stance
• 2 MPC members Chetan Ghate and Viral Acharya were for status quo in rates
• Next meeting of the MPC from April 2-4
• The minutes of the MPC’s meeting will be published by February 21, 2019

Experts' views on RBI policy decision today##Experts' views on RBI policy decision today

Aurodeep Nandi, India Economist, Nomura, Mumbai

"The MPC's U-turn – from 'calibrated tightening' in December (which effectively ruled out a rate cut) to a decision to cut rates in February is a surprise. We did expect a rate cut later this year, but the front ended delivery is a surprise even relative to our expectations. "The RBI has seen through the expansionary budget, as well as the sticky core inflation, and has found the recent softness in inflation prints to "open up space for policy action."

Puneet Pal, Deputy Head at DHFL Pramerica Mutual Fund, Mumbai

"(It) won't really be a boost for elections because you have to see the transmission from actual lending rates which may take some more time. It will not happen immediately. It is a dovish tone because they have reduced their PPI targets and I think there will be another rate cut but difficult to say whether or not in April."

"I don't think RBI's independence is compromised because headline inflation has been coming down and in the last policy RBI had hinted that if the headline inflation continues to undershoot their projection it can open up to policy easing. If you look inflation data and growth outlook, it was calling for a rate cut and the only question was if it happened in Feb or April."

Shashank Mendiratta, Economist, IBM, New Delhi

"The central bank's commentary on inflation and growth support a dovish outlook for the policy. On growth, the RBI once again highlighted downside risks to its forecast of 7.4 percent. We concur with that assessment. Trade related uncertainties due to U.S.-China trade tensions are likely to weigh on India's growth as well. The central bank also acknowledged presence of negative output gap due to tepid private investment and easing in private consumption."

"We think the impact of budget measures on growth are likely to materialise with a lag which should provide the RBI with space for rate cuts. There is a possibility of another rate cut by the central bank in April. The macro backdrop as such supports the RBI's stance and does not raise questions over its independence."

Rupa Rege Nitsure, Chief Economist, L&T Financial Services, Mumbai

"Based on the evolving dynamics of inflation, demand and growth, this is the perfect policy response in the current circumstances. Aligning NBFCs' (non-banking financial companies') risk weights to cost of bank borrowings will go a long way in correcting the distortions. By duly incorporating financial stability considerations in its monetary policy response, the RBI has done a great job in boosting the market sentiment." (Reuters)

Unexpectedly positive move for real estate sector: Anuj Puri of ANAROCK Property Consultants##Unexpectedly positive move for real estate sector: Anuj Puri of ANAROCK Property Consultants

“The RBI’s decision to slash the repo rate by 25 basis point to 6.25 percent is a welcome and unexpectedly positive move, given the sops that the recent expansionary budget gave to farmers at an additional cost of Rs 75,000 crore per annum. It was also overdue, as this has been the first cut in a long time. It definitely augurs well for the real estate sector, which also received a budget bonanza in the previous week.” Read more

Viral Acharya, deputy RBI governor##Viral Acharya, deputy RBI governor

• Central banks of economies with higher import crude baskets make higher errors on inflation
• Large inflation surprises seem to be related to a supply glut
• Official statistics on supply are released once a year
• Important point to note is that actual output has gone somewhat below potential

Shaktikanta Das##Shaktikanta Das

• Shift in stance to neutral also provides flexibility and room to address challenges to sustain growth as long as inflation outlook remains benign
• If we see that inflation remains below 4%, there is room to act
• Fiscal deficit of 3.4% for FY19 & FY20 has been factored into our projections
• We monitor liquidity on a daily basis; will react when needed