February 6, 2020 / 7:56 AM / 14 days ago

Instant View: India central bank holds steady, seeks to balance growth and inflation risks

BENGALURU (Reuters) - The Reserve Bank of India (RBI) held rates steady on Thursday and retained an accommodative policy stance as it sought to support faltering growth and avoid stoking already high inflation levels.

The central bank has its work cut out as the economy is forecast to grow 5% in the year ending in March, its weakest pace in 11 years. A rapidly-spreading coronavirus outbreak in China has also heightened concerns around the world of a damaging blow to global growth.

Economists polled by Reuters had expected the RBI’s Monetary Policy Committee (MPC) to leave its key repo rate INREPO=ECI unchanged at 5.15% and reverse repo rate INRREP=ECI at 4.9%.

All six members of the MPC voted to keep rates steady and retain the accommodative monetary policy stance.

KUNAL KUNDU, INDIA ECONOMIST, SOCIETE GENERALE, BENGALURU

“The RBI’s decision is not surprising as the economy is showing classic signs of stagflation. Sharply higher inflation has come in the way of RBI playing the rate-cut card, even as economic weakness persists.”

“With capacity utilization not far from all-time low levels, corporates lacking pricing power and rural/urban terms of trade being in a negative zone for the longest ever period, we do not see any major inflationary pressure going forward.”

“We believe the RBI would eventually embark on an easing mode from the end of 2Q20 onwards, and could likely cut the policy rate twice (by 25bp each) during FY21.”

SHASHANK MENDIRATTA, ECONOMIST, IBM, NEW DELHI

“The decision to keep policy rate on hold was based on the recent surge in inflation driven by food prices. The federal budget has also fallen short of counter cyclical measures, given the limited fiscal space. Arguably, the current spike in the inflation is due to temporary shocks, which should dissipate once supply conditions turn normal. In our assessment, growth recovery has to be addressed meaningfully and durably. Therefore, we think that space exists for future monetary policy action once the price pressures ebb.”

UPASNA BHARDWAJ, SENIOR ECONOMIST AT KOTAK MAHINDRA BANK, MUMBAI

“The MPC has expectedly kept the policy rate and stance unchanged given the inflation trajectory overshooting beyond the upper level of the target band of the committee. Very aptly, the MPC has addressed the growth concerns through pushing transmission via tweaking the liquidity framework, providing long-term refinancing operations and incentivizing credit to select sectors. We expect these measures to aid transmission and help revive sectors in stress.”

SIDDHARTHA SANYAL, CHIEF ECONOMIST & HEAD OF RESEARCH, BANDHAN BANK, MUMBAI

“It is heartening to see that the MPC avoided any undue panic despite the latest CPI reading being significantly higher than the upper limit of the target band.

“Indeed, the current spike in headline was driven primarily by a small number of perishable food items, mostly reflecting short-term supply disruptions. Core CPI inflation is still soft at the sub-4% zone. Pricing power for several industrial commodities remains modest, as reflected in the WPI inflation reading of 2.6% y/y in December.

“Overall, the recovery in economic activity will likely be only gradual, suggests a host of lead indicators. Accordingly, despite expectations of some uptick in growth, the negative output gap looks set to persist for several quarters.”

SUMAN CHOWDHURY, PRESIDENT, RATINGS AT ACUITÉ RATINGS & RESEARCH, MUMBAI

“The MPC’s decision to hold the policy rate has been completely in line with our expectations. The RBI believes that the inflation outlook remains uncertain and may remain elevated through the first half of FY21.

“Also, it expects the interest rate transmission to be more effective and act as a growth booster as more banks link their lending rates directly to the policy rate. Therefore, any further rate cut looks a little unlikely in the next two quarters though the RBI has decided to ‘persevere’ with the ongoing accommodative policy.

“The central bank has also decided to incentivize banks’ lending for retail and MSMEs further by giving equivalent benefit on their CRR requirement.”

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI

“This time the RBI is showing that on the growth front there has been some level of pick-up. Inflation projection has been revised upwards and this is not a situation where RBI can cut rates until or unless the retail inflation comes down substantially.

“We see several things improving like fertilizer sales, air passenger traffic. Even in areas where the growth was muted like mining and car sales, there has been a bottoming out and there seems a slow recovery is on the way. We expect a slow recovery coming and expect it to continue for the next four to six quarters.”

“Given the kind of pick up in inflation, RBI did not have much choice rather than going for a pause.”

ANAGHA DEODHAR, ECONOMIST, ICICI SECURITIES, MUMBAI

“Given the expected inflation trajectory, we do believe there is room for one residual rate cut, possibly in the August policy. While inflation is likely to remain elevated until Q2FY21, the room for easing will open up only at the beginning of Q3.

“There are already some green shoots of recovery in manufacturing. Sustaining manufacturing momentum is important from a growth perspective. Improving credit flow to manufacturing units and ensuring better transmission of interest rates should be the primary focus.”

The coronavirus could shave off 100bps from China’s Q1 GDP growth and around 30 basis points from annual growth. Hence, sectors in India which are heavily dependent on China, like base metals and chemicals, could suffer.”

DEEPTHI MARY MATHEW, ECONOMIST, GEOJIT FINANCIAL SERVICES, KOCHI

“It was an expected move by the RBI, maintaining the repo rate unchanged at 5.15%. With the inflation rate breaching the upper band, it will take time for the central bank to revive the rate cuts. By maintaining an accommodative stance, there is scope for rate cuts once the inflation rate falls back to a comfortable level.”

PRITHVIRAJ SRINIVAS, CHIEF ECONOMIST, AXIS CAPITAL, MUMBAI

“There is more steam left in the RBI’s rate-cutting cycle, but very limited (maximum another 25 to 50 basis points) and that depends on how quickly the food inflation shock dissipates.

“Looking at the central bank’s CPI inflation trajectory, it is safe to say RBI could wait to see how the next monsoon rains pan out before taking a call to lower policy rates.

“We believe that the budget’s impact on growth is neutral.”

JOSEPH THOMAS, HEAD OF RESEARCH - EMKAY WEALTH MANAGEMENT, MUMBAI

“In the recent policy pronouncements, the RBI had very clearly indicated that the requirements of growth should get precedence over stability, against the conditions of sluggish economic growth and the fall in consumption and investment demand.

“It was widely expected that the RBI was likely to continue with the pause till there is greater visibility on the inflation front. At this juncture, rate modification is not required as the interbank market has a huge surplus of close 3 trillion rupees ($42.08 billion) to support the liquidity requirements of the system, and this alone will ensure that the short-term rates do not move up.”

GARIMA KAPOOR, ECONOMIST — INSTITUTIONAL EQUITIES, ELARA CAPITAL, MUMBAI

“The recent high prints of CPI inflation have altered the RBI’s rate-cutting trajectory. While CPI inflation will cool off from the recent highs as vegetable prices ease, we are unlikely to see inflation cooling below 6% until June 2020. We continue to expect the MPC to stay on hold through CY2020.

“Given the still subdued growth outlook and elevated trajectory for CPI inflation till mid-2020, we believe any room for a rate cut may only emerge towards Q4FY20.

“There isn’t any impact from the coronavirus outbreak in India as yet. But it needs to be watched very closely, especially since the pace at which it is spreading is swift. The disruption of global supply chains and its ramifications for India need to be watched closely”

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI

“(The RBI’s rate decision is) in line with expectations. It is likely to maintain a status quo in the near term. With an inflation forecast of 3.2% factored in for Q3 FY21, in conjunction with our forecast, we expect RBI rate action in October 2020 monetary policy. (We) expect 25 bps rate cut then”

RUPA REGE NITSURE, GROUP CHIEF ECONOMIST, L&T FINANCIAL HOLDINGS, MUMBAI

“Today’s monetary policy response is the most optimum in the current circumstances.

“By keeping the stance at accommodative, by granting CRR exemption against the loans given to the stressed sectors and extending a one-time restructuring for MSMEs, etc, the policy has strengthened the stimulus package announced by the Union Budget.”

Reporting by Derek Francis, Chandini Monnappa, Anuron Kumar Mitra, Nallur Sethuraman, Nivedita Bhattacharjee, Chris Thomas and Sachin Ravikumar in Bengaluru; compiled by Uttaresh.V

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