RBI may not embark on aggressive easing cycle: experts

The Reserve Bank of India (RBI) cut its policy interest rate by 25 basis points on Friday for the third time since January, as expected, as growth slows and inflation ebbs, but said there is little room to ease monetary policy further.

The RBI trimmed the repo rate to 7.25 per cent, its lowest since May 2011, and kept the cash reserve ratio (CRR) for banks unchanged at 4 per cent, also in line with expectations.

However, it warned that the risk of inflationary pressure persists despite a recent sharp decline in wholesale price index (WPI) inflation, and said a high current account deficit poses the biggest risk "by far" to the Indian economy.

DR. TIRTHANKAR PATNAIK, DIRECTOR, INDIA STRATEGIST AND CHIEF ECONOMIST, RELIGARE INSTITUTIONAL RESEARCH

"The RBI's FY14 annual credit policy maintains a cautious stance on inflation, targeting a 5% figure for March 2014, even as it conceded inflation risks had receded in the near-term. FY14 growth at 5.7% is meaningfully lower than the Govt.'s 6.4% figure, and unlikely to revive in a hurry. While the 25bps cut on the repo and leaving the CRR unchanged were both on expected lines, we expect further easing this year, as the central bank responds to weaker growth. Overall we expect another 75bps on the repo this fiscal, but maintain that the key remains effective monetary transmission."

DIWAKAR GUPTA, THE MD AND CFO AT STATE BANK OF INDIA

"A cut in repo rate does not immediately translate into a cut in lending rates by banks, as it makes no significant difference or additional numbers in the bank's earnings and revenues.

"Repo rate can affect banks' profitability in medium term, but that comes with a lag. A CRR cut, on the other hand, immediately releases cash which can be put to work...transmission is immediate."

MALAY MUKHERJEE, EXECUTIVE DIRECTOR AT CENTRAL BANK OF INDIA

"We were expecting a CRR cut, in which case the benefits could have been passed to consumers immediately."

LALIT KUMAR JAIN, CHAIRMAN OF CREDAI

"We sincerely hope that the RBI will keep up the trend of repo rate cut and facilitate a fall in interest rates so that the EMI burden on common house buyer gets reduced considerably. We also stress the need for the RBI formulating a special policy for the housing industry with focus on affordable housing and quick and equally affordable financing of such projects. The governments at the Centre as well the States have all been proclaiming that they are committed to affordable housing. The RBI should also play its part by scrapping the negative weightage given to the real estate industry so that the commercial banks took a pragmatic and practical view of housing sector."

C SHEKAR REDDY, NATIONAL PRESIDENT OF CREDAI

"We seek indulgence of RBI and Finance Ministry to stimulate supply and demand in the Housing Sector. We appreciate the Finance Ministry's initiatives to encourage financing of projects held up for want of funds. It is time for all of to move further and look at the real estate industry as a whole.

On the RBI's concern over supply chain constraints:

"Real estate industry could contribute to improvement of the situation as over 200 industries can have the benefit of a chain reaction. We need a supply-driven economy rather than a supply-constrained policy."

RADHIKA RAO, ECONOMIST, DBS

"Cautious RBI commentary today in addition to yesterday's macroeconomic report which highlighted 'very limited room' to ease rates has overshadowed relief from the 25 bps rate cut. As expected, the CRR was left unchanged, as policymakers seem convinced that bond buybacks and lowering of the government cash balances will be sufficient to thaw liquidity conditions and improve transmission.

"In essence, the guidance from the central bank is that the correction in the inflation and current account position is more cyclical rather than structural. Thereby caution should be exercised on both counts and that the central bank is unlikely to embark on an aggressive easing cycle if they are not convinced that the structural constraints have been addressed. Some sacrifice by way of slower growth seems inevitable then."

A. PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP LTD

"I think the RBI is still accommodating, and when they say there is little room to cut, it suggests there is one more cut, maybe not in the next policy review but possibly in July provided inflation continues to come down.

"I think the HTM (hold-to-maturity) cut is spaced out, maybe immediately it could be a little negative, but the way it is being implemented, I think the market should be able to absorb it. But with supply pressure in May, there could be some upward pressure in yields."

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK

"I think it is in conjunction with the hawkish tone yesterday, in terms of the risks that are outlined by the Reserve Bank such as likely resurgence in inflation later. There is reiteration of emphasis on improved governance and addressing of supply bottlenecks, which is essentially in the government's policy domain.

"As such the scope for RBI to cut rates further is contingent to some of these steps which may be undertaken by the government. We, however, believe that inflation is likely to move around comfortable trajectory given the outlook on commodities and given the continued deceleration in growth momentum in the first half. Clearly, the RBI has highlighted very limited space and the inference is utmost another 25 basis points and we are unlikely to see rate cuts beyond that."

DARIUSZ KOWALCZYK, SENIOR ECONOMIST EX-JAPAN ASIA, CREDIT AGRICOLE CIB

"The RBI's statement language disappointed markets. The central bank said growth rebound likely only from Q4 2013, inflation risks mean 'little space' for more easing, and highlighted risks from current account deficit adding that they may cause a 'swift' policy 'reversal'.

"We still see two more cuts this fiscal year and modest upside to the INR as well as G-Sec yields and the INR OIS curve."

ARVIND CHARI, FIXED INCOME FUND MANAGER, QUANTUM ASSET MANAGEMENT

"It is a very balanced policy but the HTM cut of 50 bps every quarter may be higher than market expectations. Also, WPI target at 5 percent for end-March 2014 would mean that commodity prices would need to remain lower/benign to allow RBI space to cut more."

ROBERT PRIOR-WANDESFORDE, DIRECTOR, ASIAN ECONOMICS RESEARCH, CREDIT SUISSE

"I think there is a little bit of disappointment because of the lack of a cash reserve ratio cut. The market will take some time to fully digest this statement.

"All the way along, Subbarao has been cautious, and that is the message. Today's statement suggests there is room for another 25 basis point reduction in the repo rate.

"However, if growth continues to disappoint, inflation is on the downside and the current account deficit improves more than expected, we will get more reductions than effectively suggested in today's statement. I think there could be another 50 basis points cut in the repo rate in 2013."

SONAL VARMA AND AMAN MOHUNTA, NOMURA

"The Reserve Bank of India (RBI) cut its repo rate by 25bp to 7.25 per cent, in line with our and Consensus expectations, using the space provided by the steady fall in core and headline WPI inflation, to address the 'accentuated risks to growth.' The cash reserve ratio was unchanged at 4.00 per cent (again in line with our and Consensus expectations). The RBI also announced that it will phase a reduction in the hold-to-maturity (HTM) ratio by 2 per cent to 23 per cent (by at least a 50bp cut every quarter), beginning in Q2 2013.

"The RBI expects a modest recovery in India and has projected real GDP growth at 5.7 per cent y-o-y in FY14 (year ending March 2014) from a decade-low 5.0 per cent in FY13. The RBI expects a slight moderation in WPI inflation in April-September (H1 FY14) but inflation to pick-up after. On the whole, the RBI expects WPI inflation to remain around 5.5 per cent y-o-y in FY14 from 6.0 per cent y-o-y currently.

"Even as the RBI cut rates today, its forward guidance continues to be cautious as significant upside risks to inflation, the current account deficit (CAD), and its financing, all limit space for further easing, in its view. According to the RBI: "With upside risks to inflation still significant in the near term... monetary policy cannot afford to lower its guard against the possibility of resurgence of inflation pressures. Monetary policy will also have to remain alert to the risks on account of the CAD and its financing, which could warrant a swift reversal of the policy stance. Overall, the balance of risks stemming from the Reserve Bank's assessment of the growth-inflation dynamic yields little space for further monetary easing."

"In our view, given the recent fall in commodity prices and the slow rate-cutting cycle, upside risks to inflation are likely to remain contained against a backdrop of weak growth, creating more space for future rate cuts."

TUSHAR PODDAR, MANAGING DIRECTOR AND CHIEF INDIA ECONOMIST, GOLDMAN SACHS

"The Reserve Bank of India (RBI) cut the repo rate to 7.25 per cent from 7.50 per cent, in line with Bloomberg consensus and our expectations. The RBI kept the Cash Reserve Ratio (CRR) of banks unchanged at 4.00 per cent. A third of economists polled by Bloomberg were expecting a 25 bps cut on the CRR. After today's decision, the reverse repo rate and the marginal standing facility rates will be lowered to 6.25 per cent and 8.25 per cent, respectively.

"The RBI announced its growth and inflation projections for FY14. On GDP growth, it was very circumspect, stating that it expects a pickup only in the second half of the year. Its baseline GDP forecast is at 5.7 per cent.

"The RBI expected WPI inflation '...to be range bound around 5.5 per cent during FY14, with some edging down in the first half on account of past policy actions, although there could be some increase in the second half, largely reflecting base effects.' It further stated that it would endeavour to condition the evolution of inflation to a level of 5 per cent by March 2014 using all instruments at its command.

"The forward guidance by the RBI was relatively hawkish. It said that the balance of risks 'yields little space for further monetary easing'. It mentioned that upside risks to inflation were still significant in the near term, and monetary policy could not afford to lower its guard against the possibility of a resurgence of inflation pressures. The RBI remains concerned about the current account deficit, and noted that risks on that account 'could warrant a swift reversal of the policy stance'.

"The RBI has put the ball in the government's court to boost growth. It said that 'recent monetary policy action, by itself, cannot revive growth.' This needed to be supplemented by efforts towards easing supply-side bottlenecks, and continuing commitment to fiscal consolidation.

"The forward guidance, along with the hawkish language in the annual report released yesterday, suggests to us that the RBI is unlikely to cut again in its June 17 policy meeting. We also think that the probability of a cut in the July 30 meeting is also only slightly higher than 50 per cent, given the RBI expects inflation to be softer over the next few months. Market expectations of more than 3 policy cuts over the next 12 months would likely be tempered in our view, given the RBI's guidance."

NAINA LAL KIDWAI, PRESIDENT FICCI

FICCI Welcomes RBI's decision to continue its stance of accommodating monetary policy, giving the much desired support to the industrial growth and the hope of spurring investment activity. FICCI feels that the 75 basis points decline in the repo rate so far this year will be instrumental in reviving the confidence of the industry.

FICCI hopes that this will result in a commensurate decline in lending rates. While the repo rate have been brought down by 125 bps between April 2012 and May 2013, the lending rates have not come down. The base rate as on April 19, 2013 was 9.70/10.25 vis-a-vis 10.00/10.75 last year.

The headline inflation numbers at this stage show clear signs of softening and a sharp dip has been reported in core inflation numbers as well. So at least on this front there is some respite. Further, according to RBI's Macroeconomic and Monetary Developments Report announced yesterday, headline inflation is likely to remain range-bound in 2013-14, with some further moderation in H1 due to subdued producers' pricing power and falling global commodity prices. This decision is therefore very timely.

The industrial growth is really slowing down and has not yet bottomed out. There has also not been much improvement in the credit disbursal to the industrial sector.

The cut in the repo rate will give the right signal to the members of India Inc. Going ahead, it will be important to continue with this stance at least over the next quarter.

FICCI has been reiterating that kick starting investments would be the key to give an impetus to growth. The recent progress in giving clearances to the number of stalled projects is encouraging and this momentum needs to be continued going ahead. The ICOR has to be brought down to 4 from the current level of 5, to achieve a growth rate of 6.1 to 6.7 per cent in the year 2013-14, as projected by Economic Survey or even the 6 per cent growth rate as projected by RBI's survey of professional forecasters lowered the growth forecast for the year 2013 -14 to 6 per cent.

RBI in its Monetary policy stance has promised to keep a close watch on the liquidity scenario and FICCI hopes that Industry will be able to raise credit at the right time and at the appropriate cost going forward which is critical for reviving growth sentiment.

With inputs from Reuters