After RBI Surprise, Analysts Still See Scope For 50-Basis-Point Rate Cut In Current Cycle

The Reserve Bank of India (RBI) kept its key lending rate on hold in a shock decision on Thursday, despite a worrying slowdown in the country that prompted the central bank to sharply reduce its economic growth forecast to 5 per cent for the year through March.

The central bank acknowledged that it does have room to cut rates further, but said it was concerned about inflation in the near term.

"The MPC recognises that there is monetary policy space for future action. However, given the evolving growth-inflation dynamics, the MPC felt it appropriate to take a pause at this juncture," the committee said in a statement. (Read full MPC statement here)

COMMENTARY

Madhavi Arora, lead economist, FX and rates, Edelweiss Securities, Mumbai:

"We think that this easing pause is temporary. In a situation when growth slowdown looks more entrenched and underlying core inflation has slumped to sub-3.5 per cent amid widening output gap, the monetary accommodation still has further steam for another 50 bps in this rate-cut cycle. That said, we reckon with the RBI that a coordinated policy response both by the government and the RBI is required in the current slowdown cycle."

"However, we do realize the policy paradigm has to move beyond rate cuts and conventional fiscal easing. The policymaker should continue to address the problem of credit and business confidence and overall financial stability to break the selective liquidity trap for optimization of the rate transmission."

Sunil Rohokale, managing director and CEO, ASK Group, Mumbai:

"The RBI should focus on earlier rate-cut transmission aggressively. The wider credit flow from banks, HFCs and NBFCs would be crucial to GDP growth of 5-6 per cent in the next few quarters."

"The most distressed sectors like real estate and MSME credit flow is completely frozen and the crisis of confidence is grave."

"We cannot dream to have GDP growth of 6 per cent-plus without real estate and MSME sector recovery, which are significant contributors to economy and job creation."

Rajani Sinha, chief economist, Knight Frank, Mumbai:

"Given the growth concerns, we still feel there are chances of one more rate cut by April 2020."

"The RBI's growth projection could still be marginally revised downwards going forward, especially for first-half of 2020-21. Growth has slowed on all quarters - investment, consumption and exports. Hence, the revival is likely to be slow and painful."

"Given the poor aggregate demand scenario, I do not see overall inflation posing a serious threat."

"There is a need for further fiscal stimulus. In fact, a direct measure like income tax cut will provide immediate boost to consumption. Monetary policy decision could be put on hold if the government comes up with strong fiscal stimulus, as the central bank would be wary of the inflationary impact of the same."

Nikhil Gupta, chief economist, Motilal Oswal Financial Services, Mumbai:

"Overall, today's status quo increases the credibility of RBI's inflation mandate."

"We had always believed that today's cut would be the last rate cut in this cycle. We continue to maintain that there will be no more rate cuts now unless inflation falls back towards 4 per cent."

Sudhakar Shanbhag, chief investment officer, Kotak Mahindra Life Insurance Company Limited, Mumbai:

"Against an almost consensus market expectation of a rate-cut based on the slowdown seen in growth, the MPC seems to have chosen to focus on its mandate of inflation management and have recognised that the latest CPI print and expected prints over next few months would be higher than their targeted level and also a belief that past rate-cuts will help to support growth with focus on transmission."

Upasna Bhardwaj, senior economist, Kotak Mahindra Bank, Mumbai:

"It is a surprise, but having said that I think the RBI has preferred to stay cautious because inflation numbers in the near-term seem to be ahead of its medium target."

"We continue to see room for 50 bps rate-cut ahead, but we'll have to wait for food price correction to happen before we can start expecting that."

"The RBI has slashed its growth rate quite a bit now to 5 per cent. Having said that, we see further downside risk to this growth at this point. We are looking at 4.7 per cent."

"The government has very limited fiscal headroom. In terms of big ticket measures, it will be difficult for the government to take measures. They will have to do some small tweaking in terms of rural spending and boost to real estate demand."

Siddhartha Sanyal, chief economist and head of research, Bandhan Bank, Kolkata:

"This is a pause, but definitely not the end of the easing cycle. The debate in the coming few months will remain between a cut and hold. An accommodative stance doesn't necessarily mean a rate cut in every single monetary policy meeting."

"It was a close call this time for the MPC, whether to cut or not to cut rates. Given that there is a bit of pressure currently on headline inflation, RBI opted for a pause."

"Going ahead, inflation numbers for the next one or two prints may actually move higher, breaching the 5 per cent mark. Since broader inflation trends are very much under control, I don't think today's pause will be a long-term stance. Once the headline numbers soften - and that should happen relatively soon - it will open up the space for the RBI to deliver more rate cuts."

Anagha Deodhar, economist, ICICI Securities, Mumbai:

"The MPC's decision to pause is indeed surprising. This review marks a break from past trends as inflation concerns seem to have taken front-seat again."

"Although they have stated that there is space for future action, I do not see rates going down by much in FY20 as inflation is expected to inch up sharply from here. The effectiveness of monetary policy in stimulating growth is limited in the current context."

"The recent GDP data showed that government spending is the only strong leg of the economy currently. I think the government will let go of the deficit target this year and try to boost growth through increased spending. We could see more sector-specific relief and/or stimulus packages in the coming months."

"Fiscal slippage is generally perceived negatively by the MPC. However, in the current context, I think the MPC will be more tolerant of fiscal slippage and continue with accommodative cycle."

Rupa Rege Nitsure, group chief economist, L&T Financial Services, Mumbai:

"Cumulatively, monetary policymakers have done everything that was expected of them. Their revised projections of GDP and CPI inflation are realistic."

"Going ahead, we need more actions from the government - Centre, states and local bodies that will make "spending" and "taxation" more efficient. This is a deep and protracted slowdown and India will witness a gradual recovery rather than a V-shaped recovery given the headwinds in both domestic and global economies."

Sakshi Gupta, assistant vice-president, HDFC Bank, Gurugram:

"The RBI's decision was a surprise, especially the fact that it was a unanimous decision. In the growth-inflation trade-off, the RBI has clearly leaned towards the latter."

"We do not think that the recent inflation spikes are permanent and as food prices stabilise, headline inflation is likely to cool off by the beginning of next fiscal year. More importantly, core inflation momentum continues to remain weak."

"Given the outlook on inflation and as RBI stance remains accommodative, we do not think this is the last cut in the current cycle but probably a brief pause. Growth momentum is likely to improve gradually, and therefore, it is likely to warrant further rate cuts."

Rajesh Cheruvu, chief investment officer, Validus Wealth, Mumbai:

"The MPC unanimously and shockingly left rates unchanged, but maintained accommodative stance against consensus market expectations of 25 bps cut. Given the widening fiscal deficit concerns, G-Sec supply pressure and wider-than-average spreads, we prefer good-quality corporate bonds over G-Secs. Any truce on the trade war and growth positives will benefit short vs long duration, which is our preferred strategy."

Jimeet Modi, CEO, Samco Securities, Mumbai:

"The RBI has finally thrown the ball back in government's court to revive the economic engine, which has further deteriorated since the last meet. Transmission of interest rates have not happened yet, which could be one of the reasons the RBI waited to cut rates and nudged the government and banks to take efforts from their end. Additionally, slightly higher inflationary tendencies might have also led to the pause in rate cut."

"However, this is a negative for the markets as a rate cut was required to boost risk taking appetite in the economy."

Darren Awe, Asia economist, Capital Economics, Singapore:

"Tentatively, we are pencilling in a 25 bps cut in February. Beyond that, the picture is less clear. A strong recovery in growth in the near term seems unlikely, but there are at least glimmers of stabilisation in the recent data. Although industry continues to struggle, gauges of services activity, consumption and credit growth have all improved a little. And the effect of past monetary and fiscal stimulus should be felt soon. Our base case for now is that the easing cycle will come to an end in February."

Kunal Kundu, India economist, Societe Generale, Bengaluru:

"While the decision to pause is not entirely unjustified given the clear lack of efficacy of monetary policy actions through the policy rate cut channel, what was worrying is that the RBI did not announce any unconventional measure aimed at improving the efficacy of its monetary policy actions but rather relied on hope for better transmission of its past actions, despite the fact that the transmission of past actions till date remained rather weak."

"We still expect the RBI to cut the policy rate by another 50 bps next year once the low statistical base effect reverses and headline inflation cools."

"For the current financial year, aggregate demand situation looks quite grim and given the lack of discernible festival period driven bump in demand, we believe that the economy will just muddle through for the next at least six quarters."

"The RBI's downward revision of growth forecast appears prudent. What is a worry though is that the optic of high headline inflation appeared to have taken precedence over a dangerously slowing activity level."

"Following today's decision, the onus of spurring growth shifts firmly on the government. We believe that for the time being, the only short term solution is rising public spending in infrastructure that has a much higher employment elasticity and help increase the aggregate demand in the economy."