RBI rate cut leaves experts confused and markets spooked
The rate cut led several banks to cut base rates, while realty firms were hopeful that it will spur housing demand
New Delhi: Reserve Bank of India (RBI) governor Raghuram Rajan may have termed the monetary policy announcement a Goldilocks policy, “neither conservative nor aggressive... Just right given the current situation", but it was anything but a fairy tale as far as the markets were concerned.
The markets tanked around 600 points on Tuesday as Rajan indicated that there was limited room for further rate cuts and the India Meteorological Department (IMD) downgraded its monsoon forecast to “deficient".
RBI’s rate cut, its statement that the government needs to do its part on food policy and management to keep inflation down, and the monsoon forecast indicate that the rate cut cycle may be over—for now. Read more
Welcoming the 25 basis point cut in repo rate (a basis point is one-hundredth of a percentage point), the rate at which RBI lends to commercial banks, experts said there was room for more cuts in the future, but added that the upward revision of inflation and downward revision of gross domestic product (GDP) caught the market off guard. They agreed that another rate cut may not be expected anytime soon. Subhada Rao, chief economist, Yes Bank Ltd, said, “In line with anticipation, RBI has cut the repo rate by 25 bps. Further rate cuts definitely would be contingent on a lot of factors, in terms of the impact of monsoons etc." Read more
A Wall Street Journal report said RBI is going back to the more patient aspects of the monetary policy, because of which investors would also need to be a little patient.
Defending his decision to cut rates, Rajan said GDP growth might be weaker than what the headline number suggested and questioned why an economy needed rate cut when it was growing at 7.5%. There is a “contradiction" in the higher GDP growth numbers and poor corporate earnings while there was no visible pick-up in the consumer demand, he added. Read here
But what makes monsoons so relevant to India’s monetary policy? Although the industry and service sectors are more important for India now than before in the structure of the economy, the fact remains that a large proportion of the population is dependent on agriculture constituting the base for the demand for consumer goods, besides industrial products like fertilisers. But then that is only one of the factors. Read more
Another interesting question that experts posit is why yields on government bonds rose by 11 basis points on a day when Reserve Bank of India governor Raghuram Rajan reduced the rate at which he would lend by 25 basis points? Yet another example of how investors see the future rather than today’s action. Find the answer here.
The rate cut led several banks, including State Bank of India and Allahabad Bank, to cut base rates, while realty firms were hopeful that it will spur housing demand. Read more
What’s next?
Having delivered a cumulative 75 basis point rate cut in a span of five months, what should the Reserve Bank of India’s (RBI) optimal policy stance be going forward? According to Sonal Varma, executive director and India economist, Nomura Financial Advisory and Securities India Pvt. Ltd, even as there may be frustration with the current pace of economic recovery, more time needs to be given to judge the full impact of the rate cuts delivered thus far. Read here
On the stock markets, the view is that they will only go down from here. Andrew Holland, chief executive of Ambit Investment Advisors, said: “There is nothing much for the markets to be excited about and I expect them to go down from here… However, if we had a 50-bps cut on Tuesday, bank stocks might have reacted positively and capital goods stocks would have moved. The markets are in a bit of a twilight zone and there are no catalysts or positive triggers for any sector. We’ll have to wait till the economy starts to recover. Global factors such as Greece and an interest rate decision by the US Federal Reserve could weigh on the sentiment." Read more here
Moreover, no more rate cuts are expected this year, thanks to the risk of deficient rainfall. Pranjul Bhandari, chief India economist at HSBC, said that in the event of an irregular monsoon, Tuesday’s rate cut will be the last, for now. Read more
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