Will the RBI cut interest rates today? Here's what top brokerages expect

While the Monetary Policy Committee (MPC) of the RBI originally was slated to meet in the first week of April, the central bank in a surprise move is holding a briefing today.

The government provided Rs 1.7 trillion package aimed at providing relief to the poor and marginalized sections of society. Most experts have termed it as the first tranche of the relief measures from the authorities and expect the Reserve Bank of India (RBI) to follow it up with a cut in interest rates besides announcing other liquidity support measures.

While the Monetary Policy Committee (MPC) of the RBI originally was slated to meet in the first week of April, the central bank in a surprise move is holding a briefing today. Here is what leading brokerages expect from the central bank.

Brickwork Ratings

In keeping with the promise of the RBI Governor that the RBI will do whatever it takes, it is reasonable to expect a sharp reduction in the borrowing costs. We expect the RBI to continue with its liquidity infusing tools such as open market operations (OMOs), forex swaps and long-term refinance options (LTROs), but also to announce measures to support corporates suffering from business losses due to the pandemic outbreak.

As the ongoing slowdown will drastically impact the financial health of many sectors, we expect the RBI to introduce forbearance measures towards the most affected or stressed sectors, and extend the repayment schedule and moratorium, along with implementing other measures, to avoid large NPAs and reduce risk weights. We expect the RBI to continue with accommodative monetary policy actions and stance; and cut the repo rate by 50 basis points.

Nomura

We believe the RBI is running the risk of falling behind in terms of proactive policy intervention, especially with the magnitude of shocks currently hitting the Indian economy and the financial system. So far, the measures have been on increasing domestic and dollar liquidity to ease financial conditions.

RBI policy: Repo rate unchanged at 5.15%; FY21 GDP growth projected at 6%

In its last policy meet, the central bank had maintained the repo rate at 5.15 per cent points (bps).

The monetary policy committee (MPC) of the Reserve Bank of India (RBI) on Thursday kept the repo rate unchanged at 5.15 per cent — a 10-year low in its last policy review of the financial year 2019-20 (FY20).

Consequently, the reverse repo rate stands unchanged at 4.90 per cent.

Further, the bank said it will maintain 'accommodative' policy stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target.

The committee voted 6-0 in favour of the status quo of the interest rates.

GDP growth forecast for the financial year 2020-21 (FY21) is projected at 6 per cent and in the range of 5.5-6.0 per cent in the first half of the next fiscal and 6.2 per cent in Q3 (October-December period). GDP growth for FY 2019-20 is seen at 5.0 per cent.

The CPI inflation projection has been revised upwards to 6.5 per cent for Q4:2019-20; 5.4-5.0 per cent for H1:2020-21; and 3.2 per cent for Q3:2020-21, MPC said in its release.

 The MPC noted that inflation surged above the upper tolerance band around the target in December 2019, primarily on the back of the unusual spike in onion prices. However, going forward the onion prices are likely to ease on the improvement in supply conditions.

"Going forward, the trajectory of inflation excluding food and fuel needs to be carefully monitored as the pass-through of remaining revisions in mobile phone charges, the increase in prices of drugs and pharmaceuticals and the impact of new emission norms play out and feed into inflation formation," the statement added.

RBI's policy surprise: Pause on rate cuts may hit real estate, auto sectors

Real estate developers were expecting a rate cut of 50 to 100 basis points.

Business Standard : The Reserve Bank of India’s (RBI’s) move to pause rate cuts will hit the beleaguered real estate and auto sectors hard. These sectors were expecting another rate cut by the central bank to help revive sagging consumer demand.

CEOs said benefits from the previous rate cuts are yet to play out completely and the real estate industry is still reeling from the liquidity crisis as consumers are not coming forward to buy new houses or cars.

Real estate developers were expecting a rate cut of 50 to 100 basis points which would have provided a boost to the government’s recent initiatives to rev up the economy.

“One-time roll over to restructure bad loans would have been a logical step across industries. Thus, the decision to wait and watch the outplay of the previous cuts will go against the current sentiments,” said Niranjan Hiranandani, MD of real estate firm Hiranandani Constructions.

A rate cut would have helped the balance sheets of builders, which are defaulting on bank loans as customers are not booking under-construction flats as they fear the developer won’t be able to complete the project in time. Several builders like Peninsula Land in Mumbai have failed to repay bank loans. Customers are not booking new homes even though builders have reduced prices of their under-construction flats by 20 per cent in Mumbai.

“Customers don't want to take any risk with an under-construction project which, in turn, has stopped the cash flow to builders,” said a Mumbai-based developer. The automobile companies said a further cut in the interest rates would have helped them sell cars to fence-sitters, who are waiting for a better deal. India’s largest carmaker Maruti Suzuki’s domestic sales fell 1.6 per cent year-on-year in November. Other carmakers, too, reported fewer sales.

“With the RBI cutting the GDP growth forecast by a whopping 170 basis points, the industry is again staring at an uncertain future,” said a luxury auto dealer in Mumbai.

At the same time, a rate cut would have helped banks and NBFCs (non-banking finance companies) to revive their sagging credit growth. Sale of new home loans and auto loans from NBFCs have slowed down after the DHFL scam came to light. 

The retail loan growth rate had slowed to 7.3 per cent in the first half of 2019 -- slowest growth in the last five years. On the other hand, personal loan growth accelerated to 17.2 per cent in October 2019, from 16.8 per cent in October 2018, the RBI data showed.

The market and economists were expecting a sure cut in the policy review, considering the weak growth rate.

The Reserve Bank of India (RBI) on Thursday surprised the markets by exercising a “temporary pause” on its interest rate, as it waits to get more clarity on inflation and government measures in the upcoming Budget in February, before re-engaging with the Centre on the “national endeavour” of lifting growth.

The six-member monetary policy committee (MPC), headed by RBI Governor Shaktikanta Das, voted unanimously to keep the policy repo rate unchanged at 5.15 per cent. The RBI, however, revised its outlook for growth and inflation. The central bank revised down its 2019-20 growth forecast to 5 per cent from 6.1 per cent in the October policy review. The inflation forecast for the second half of 2019-20 was revised up from 3.5-3.7 per cent to 5.1-4.7 per cent.

Gross domestic product (GDP) growth for the second quarter came in at 4.5 per cent, the lowest since March 2012-13, according to the official data released recently. But the RBI is not worried about the slowdown, Das said in the policy press conference.

“We are just waiting for greater clarity. The government has taken several measures and the RBI has also reduced its rates subsequently. Liquidity has been in surplus mode. We should also allow some more time for the rate cuts to play out to be reflected properly. Therefore, the MPC decided to take a temporary pause,” Das said responding to a media query.

“There is a case of looking through the current spike in headline inflation, which is mainly due to a rise in food inflation. Our calculations show that food inflation in Q4FY20 is supposed to remain very high,” he said, adding that prices would start easing from February.

The market and economists were expecting a sure cut in the policy review, considering the weak growth rate.

The 10-year bond yields jumped about 15 basis points (bps) to close at 6.613 per cent on Thursday. Prices drop as yields rise.

“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 it seemed amenable towards out-of-the-box thinking and being very proactive in terms of supporting growth,” said Taimur Baig, chief economist of DBS Group.

Business Standard

RBI likely to cut rates for sixth time this year, try help growth

RBI has delivered 135 basis points of interest-rate easing this year, but lenders have only transmitted a fraction of that to borrowers.

The Reserve Bank of India is set to deliver its sixth straight interest-rate cut Thursday, shrugging off a spike in inflation as it stays doggedly focused on supporting economic growth.

While all 34 economists surveyed by Bloomberg News as of Wednesday expect a reduction, the majority expect a quarter-point cut, with the rest expecting reductions of 15 basis points to 50 basis points. The RBI has cut borrowing costs by 135 basis points so far in 2019 to a nine-year low of 5.15%.

The meeting of the six-member Monetary Policy Committee led by Governor Shaktikanta Das, who completes one year in office next week, comes amid deepening concerns about growth, financial stability and weak public finances.

The policy decision will be announced at 11:45 a.m. in Mumbai, followed by a press conference 15 minutes later by Das. Here’s a look at what else to watch out for:

Growth trajectory

The RBI has lowered its growth forecast for the current fiscal year four times already, with the latest revision in October pegging expansion at 6.1%. Data since then has shown gross domestic product expansion slowing to 4.5% in the July to September period, the weakest pace in more than six years.

“With no imminent signs of a turnaround, we expect the RBI to cut rates by 25 basis points at its December meeting,” said Teresa John, an economist at Nirmal Bang Equities Pvt. in Mumbai. The July-September period saw economic slack deepen, with manufacturing contracting. A purchasing managers survey indicated that activity in the dominant services industry slowed during that period. With surveys for both manufacturing and services in November pointing to a rebound, it’s worth watching if and by how much the RBI will further lower its growth forecast.

Business Standard

Monetary policy review: RBI set to cut rate. Question is by how much?

The policy decision will be announced at 11:45 a.m. in Mumbai, followed by a press conference 15 minutes later by Das.

Business Standard : The Reserve Bank of India is set to deliver a fifth straight interest rate cut Friday, although economists are unsure of the quantum following an unconventional 35 basis-point easing last time.

While all 39 economists surveyed by Bloomberg News expect a reduction, their forecasts range from 15 basis points to 40 basis points. The RBI has lowered borrowing costs to a nine-year low of 5.4% through 110 basis points of easing so far in 2019.

The meeting of the six-member Monetary Policy Committee led by Governor Shaktikanta Das comes amid growing concerns about India’s banking and financial sector, and just weeks after Prime Minister Narendra Modi eased fiscal levers by announcing a surprise $20 billion tax break for companies.

The policy decision will be announced at 11:45 a.m. in Mumbai, followed by a press conference 15 minutes later by Das.

Here’s a look at what else to watch out for:

Growth

The RBI has lowered its growth forecast for the current fiscal year three times already, with the latest revision in August pegging growth at 6.9%. Data since has shown gross domestic product expansion slowing to 5% in the June quarter, the weakest pace in six years. That may prompt the central bank to revisit the numbers once again.

The latest growth numbers “look much worse,” Das said recently, referring to RBI’s projection of 5.8% expansion in the April-June period. “There is a slowdown, which was evident and at the last MPC we very clearly said that growth seems to be losing traction and therefore, growth is a matter of highest priority.”

Inflation

A recent spike in onion prices notwithstanding, headline inflation has stayed below the RBI’s 4% medium-term target for 13 straight months.

Food and beverage prices, which account for about half of the consumer price basket, have climbed on the back of a surge in urban food inflation. Das has said gains in food inflation are cyclical and there won’t be much pressure on prices, given monsoon rains appear to be normal.

Core inflation, which strips out volatile food and fuel prices, has been decelerating amid subdued demand. That will give the central bank ample space to keep policy accommodative in the coming months.

Monetary policy review: Another rate cut may not help Indian economy

The larger problem here is that government finances are already in a hole; that would be a problem even if the tax cut were the best-designed in history.

Business Standard : It’s almost universally expected in India that the central bank’s monetary policy committee will lower interest rates this week. Many expect it to keep cutting until the policy rate hits 5 per cent by the end of the year; it was 6 per cent in June, and the committee cut it by an unexpected 0.35 percentage points in its last meeting to bring it down to 5.4 per cent. The arguments for a cut are manifold: The Indian economy is clearly spluttering, with growth coming in at a shocking 5 per cent in the last quarter for which data is available; consumer price inflation stands at 3.2 per cent, well below the Reserve Bank of India’s mid-point target of 4 per cent; and industry is loudly complaining that high real rates are depressing investment.

Even the hawkish monetary policy committee, which critics complain has consistently over-estimated inflation in the past, is unlikely to be able to ignore that combination of factors. RBI Governor Shaktikanta Das told the Bloomberg India Economic Forum last month that “there’s room for a rate cut, especially when growth has slowed down.” The bond market has already been given reason to cheer this week, after the government kept its target for borrowing in the second half of the financial year constant, at Rs. 2.7 trillion.

But the RBI would be wise to be cautious. The government in New Delhi won reelection in May by throwing money at the electorate, particularly rural voters. More recently, panicked by the sharp slowdown in growth, it has responded with fiscal measures that are likely to stress its finances, including a big cut in corporate income tax rates last month (though the eventual fiscal stress of that cut might be less than originally feared, given that exemptions are also being phased out).

The larger problem here is that government finances are already in a hole; that would be a problem even if the tax cut were the best-designed in history. The budget India’s finance minister presented to Parliament in July was swiftly undermined when a senior government adviser pointed out that the tax receipts seemed outdated -- and that, in fact, revenues in the last financial year were Rs. 1.7 trillion less than advertised.

In addition, the tech giant also showcased a foldable Surface Duo phone that runs on Android.

The company said the two screens would make users more productive.

RBI could make it three cuts in a row on subdued growth, benign inflation

The policy decision will be announced at 11:45 a.m. in Mumbai, followed by a press conference 15 minutes later by Shaktikanta Das.

The Reserve Bank of India is likely to cement its position as Asia’s most dovish central bank with a third straight interest-rate cut Thursday.

Keep Reading : Business Standard

The six-member monetary policy committee led by Governor Shaktikanta Das will reduce the repurchase rate by 25 basis points to 5.75% on Thursday, say 31 of 43 economists surveyed by Bloomberg, while three are penciling in a 50 basis points cut. The RBI may also switch its stance to accommodative from neutral, given that expectations are growing for the Federal Reserve to slash rates this year.

Inflation that’s stayed close to the lower end of RBI’s 2-6% band for six months has given policy makers room to support economic growth. India is among central banks across Asia shifting to looser monetary policy to boost their economies amid risks from the U.S.-China trade war. Philippines, Malaysia and New Zealand eased last month, while Australia cut interest rates this week for the first time in almost three years.

The policy decision will be announced at 11:45 a.m. in Mumbai, followed by a press conference 15 minutes later by Das. Here’s a look at what else to watch out for in the decision that comes weeks before the new government’s annual budget on July 5:

Subdued Growth

Gross domestic product growth slowed to a five-year low of 5.8% in the first three months of the year. Investment has been subdued and early indicators from auto sales to air travel show consumption -- which contributes more than 60% to GDP -- has waned amid a crisis in the shadow banking sector that’s curbed lending.

At its last policy meeting, the central bank cut its GDP forecast for the current fiscal year to 7.2% from 7.4%. Still, the reading depends on how the crucial monsoon season pans out. For now, the southwest monsoon, which waters more than half of India’s farmland between June and September, is expected to bring normal rainfall.

Economists have already trimmed GDP forecasts to 7.1% for fiscal 2020 in the latest Bloomberg survey from 7.2% previously.

“The muted growth seals the case for more rate cuts,” said Upasna Bhardwaj, an economist at Kotak Mahindra Bank Ltd. in Mumbai. “We maintain our expectation of 25 basis point rate cuts in June and August —- though an outside chance of a 50 basis-point rate cut in June itself could build up.”

RBI policy boost in low-inflation phase: Here's what data says

The MPC expects low levels of inflation to continue for a long period.

In line with market expectations, the monetary policy committee (MPC) decided to reduce the benchmark repo rate by 25 basis points last week, to 6 per cent .

The nudge came from low levels of consumer price index (CPI) inflation, which remained below expectations. Though the core CPI inflation rate dropped but remained high at 5.3 per cent in February, headline CPI inflation remained low—rising a bit—to.

The MPC expects low levels of inflation to continue for a long period. It revised projections downward to 2.9-3.0 per cent in H1 FY20 and 3.5-3.8 per cent in H2 FY20.

Expected growth in FY20 was subsequently revised downward from the initial expectation of 7.4 per cent to 7.2 per cent. Many high frequency indicators “suggest significant moderation in activity”, the MPC noted.

It is evident in the sustained contraction in auto production.

Households too are expecting inflation to subside, with the three-month-ahead and the one-year-ahead expectations declining by 40 basis points

Oil showed a different picture, with the MPC underlining the rise in global crude oil prices, which rose 10 per cent since the last policy announcement in February.

Yet, some macro indicators remained in the positive, with the investment rate rising to 33.1 per cent of GDP in Q3 FY19 from 31.8 per cent of GDP in Q3 FY18.

This was supported by “the government’s thrust on the road sector and affordable housing,” the MPC said. Capacity utilisation in industry rose to its highest in the last six years.

Business Standard

5 factors that shaped RBI's inflation forecast and 6 key risks

Besides a normal monsoon, the inflation path, according to the RBI, will be shaped by five factors.

The Reserve Bank of India (RBI) slashed repo rate by 25 basis points (bps) to 6 per cent in its First bi-monthly Monetary Policy Statement for financial year 2019-20 (FY20). The central bank, however, has assumed the monsoon to be normal this year.

Recently, private weather forecaster Skymet had forecast below-normal monsoon rains during June-September, with a 15 per cent chance of a drought.

Consumer price inflation (CPI) projection, as a result, has been revised downwards to 2.4 per cent in Q4FY19, 2.9-3 per cent in H1FY20 and 3.5-3.8 per cent in H2FY20, with risks broadly balanced.

"The RBI has adopted a very sensible and pragmatic approach by cutting the repo rate by 0.25 per cent while keeping the policy stance neutral. It takes cognizance of the likelihood or potential for inflationary pressures emerging from food prices and fuel prices and also fiscal pressures from the large government borrowing program," said Dr. Joseph Thomas, Head Research- Emkay Wealth Management.

“RBI has held on to its gradualist approach in choosing to cut REPO rate by 25bps and maintaining neutral stance. The two key risk events for inflation trend in the year ahead - monsoons and elections, cloud the near term inflation outlook and warrant continued data dependency. The forward guidance for growth and inflation remains mixed and indicate shallow cuts here and there and not a cut cycle for now,” added Rajni Thakur, an economist at RBL Bank.

Besides a normal monsoon, the inflation path, according to the RBI, will be shaped by the following five factors:

First, low food inflation during January-February will have a bearing on the near-term inflation outlook, the RBI said.

Second, the fall in the fuel group inflation witnessed at the time of the February policy has become accentuated.

Third, CPI inflation excluding food and fuel in February was lower than expected, which has imparted some downward bias to headline inflation.

Fourth, international crude oil prices have increased by around 10 per cent since the last policy.

Fifth, inflation expectations of households as well as input and output price expectations of producers polled in the Reserve Bank’s surveys have further moderated.

Business Standard

Despite RBI prod, banks unwilling to cut lending rates as deposits dwindle

Shaktikanta Das, the new RBI governor, has been trying to nudge bankers to lower lending rates, holding meetings with bank chiefs last month to discuss the monetary policy transmission.

Business Standard : Indian lenders haven’t fully passed on the central bank’s latest interest rate cut to borrowers, pressuring the monetary authority to loosen policy even more to support economic growth.

A mismatch between deposits and credit growth, and competition from the government for small-savings mean banks face a high cost of capital, limiting their ability to transmit monetary policy easing. Bankers say the Reserve Bank of India’s 25 basis-point reduction in the repurchase rate to 6.25 percent in February was a start, but was probably too little to have any impact on lending rates just yet.

Latest data from the central bank shows the main overnight lending rate offered by commercial banks has been sticky in a range of 8.15 percent to 8.55 percent since the beginning of the year. Most banks have trimmed lending rates by a ‘token’ 10 basis points, said Ashutosh Khajuria, chief financial officer at Federal Bank Ltd. in Mumbai, adding that the RBI needs to move by a bigger-than-usual 50 basis points to spur lending.

“If it is a 50 basis points cut, it will be an accelerated transmission,” Khajuria said. “If inflation behaves the way it has been,” rates will certainly go down in the first quarter of the next financial year starting April.

Subdued Inflation

Calls for rate cuts have been building, given benign inflation and weak demand. Inflation has been subdued at about 2 percent, much lower than the central bank’s medium-term target of 4 percent.

Shaktikanta Das, the new RBI governor, has been trying to nudge bankers to lower lending rates, holding meetings with bank chiefs last month to discuss the monetary policy transmission. In India, rate adjustments take about six to nine months to work its way through the economy.

Bankers remain cautious though and “are not willing to cut rates as deposits and household financial savings are at historical lows,” said Prachi Mishra, chief India economist at Goldman Sachs India Securities. “Even while policy rates are down, the rates paid by the government on small savings are significantly higher than bank deposit rates.”

Savings programs offered by the government through post offices return between 7 percent and 8 percent annually along with tax benefits, while a one-year time deposit with the State Bank of India, the country’s largest bank, earns an interest of 6.9 percent.

New RBI chief delivers election cut for PM Modi in a surprise move

The surprise 25-bps rate cut came almost a week after the Centre unveiled an expansionary budget, which included $13 billion of help for consumers ahead of the poll that's due by May.

India’s new central bank chief delivered an unexpected interest rate cut, providing Prime Minister Narendra Modi with the kind of stimulus he needs to stoke economic growth in an election year.

In a sharp reversal from October, when the Reserve Bank of India took rate cuts off the table, Governor Shaktikanta Das -- who took office in December -- opened the door to more policy easing and brought growth firmly back onto the Monetary Policy Committee’s agenda. That was a departure from his predecessor Urjit Patel, whose singular aim was to meet the RBI’s 4 percent inflation mandate.

The surprise move came almost a week after Modi’s administration unveiled an expansionary budget, which included $13 billion of help for consumers ahead of the poll that’s due by May, and days after a top adviser to the prime minister said the RBI should cut rates.

Das, a career bureaucrat, was appointed shortly after Patel resigned as governor amid a heated public battle with the state, which led to questions about the central bank’s independence from politics. Modi’s government has been pushing the RBI to transfer more of its excess capital to the state as well as ease lending restrictions on banks to spur growth.

Government officials were quick to praise the RBI’s move, while economists were more cautious, concerned that the monetary and fiscal stimulus would be inflationary.

“A very balanced and pragmatic policy statement,” Economic Affairs Secretary Subhash Garg said after the rate move. It “underlines low inflation and high growth path for India for 2019-20.”

Das pointed to a sharp slowdown in inflation as justification for the 25 basis-point reduction, taking the repurchase rate to 6.25 percent. The MPC also reversed its policy stance to neutral from ‘calibrated tightening’ adopted in October.

“Reading between the lines, it appears that Mr. Das has changed the RBI’s paradigm overnight, to one where growth is the focus of policy and inflation merely an input into decisions,” said Freya Beamish, chief Asia economist at Pantheon Macroeconomics Ltd.

That opens the way for more rate cuts, she said, adding “we are worried by the U-turn and what this week says about the RBI’s frail autonomy and discipline.”

Market reaction to the surprise rate cut was subdued. The yield on the most-traded 2028 sovereign bonds fell just seven basis points, the rupee eked out a gain and the main stocks gauge closed flat on Thursday.

The U.S. Federal Reserve’s shift to a more dovish stance is giving emerging markets like India a reprieve after last year’s rate hikes. Central banks in the Philippines and Thailand also held rates steady this week.

Business Standard