What Experts Made Of The April Monetary Policy Review

India's monetary policy committee today kept benchmark lending rates unchanged, and revised the inflation forecast downward while projecting a nascent recovery for the economy.

The six-member committee voted 5-1 to keep the repo rate unchanged at 6 percent and reverse repo rate at 5.75 percent. The GDP growth forecast has been pegged at 7.4 percent for the financial year 2018-19. The decision was in-line with market expectations. All 42 economists polled by Bloomberg forecast a status quo on rates.

The Reserve Bank of India said it continues to remain vigilant with a neutral stance. The MPC noted that global economic activity and trade have strengthened. However, fears of protectionism and a potential trade war continue pose a threat to emerging market economies like India that rely on foreign capital flows for “their developmental aspirations.”

Most economists, bankers and analysts say that RBI will be on a prolonged pause and is in no hurry to move rates. Here is what they made of the policy review.

‘Sizeable Cut In Inflation Forecast'

Benchmark lending rates are “possibly” in a prolonged pause as long as inflation stays within the RBI's comfort zone, according to Yes Bank Ltd.'s Chief Economist Shubhada Rao. A rate hike would anyway be very hard to justify with the current inflation trajectory, she told BloombergQuint in an interaction.

RBI's commentary is a positive for the market, she added.

‘A Longer Pause'

India's largest lender State Bank of India expected inflation to be more “benign” than what the markets were expecting, according to Deputy Managing Director and Chief Financial Officer Anshula Kant. And this has been validated now by the RBI revising down its inflation target, Kant told BloombergQuint in an interaction.

Kant does not expect a rate hike to happen this year.

Also Read: Monetary Policy: RBI Defers Ind-AS Implementation By A Year

‘In No Hurry'

The policy was expected and now the MPC may remain in a pause mode in the near-term, said India Ratings & Research Principal Economist Sunil Kumar Sinha.

‘Unexpectedly Dovish'

The policy was unexpectedly dovish according to HDFC Bank Ltd.'s Chief Economist Abheek Barua. However, whether this is a "transient bout of dovishness" or one that endures will remain a key question, he added.

Barua added that bond yields that have rallied are likely to cool off slightly after this announcement. “Therefore, in the short-term, the benchmark 10-year bond yield could trade in the range of 7.1 percent to 7.3 percent.”

‘RBI In Wait-And-See Mode'

The status quo on rates and monetary policy stance is in line with expectations, but the downward revision of inflation forecasts is a positive surprise and suggests no imminent policy tightening, Nomura said in an emailed note.

‘Reduces Risks Of Higher Lending Rates'

The MPC's status quo has reduced the upside risks to bank lending rates that had started pricing in a turn in the interest rate cycle, according to Crisil. It noted that there was a de facto tightening of interest rates with about 7-8 banks raising their marginal cost of lending rate between 10-20 basis points despite the repo rate being unchanged. That worry stands reduced now, it added.

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‘Bit Too Optimistic On Growth'

The MPC's assessment of the Indian economy is a “bit too optimistic on growth”, according to Edelweiss. The brokerage house expects inflation to "move higher much along the revised projections of the RBI".

‘Ind-AS Deferment Reduces Comparability'

RBI's decision to defer the implementation of Ind-AS for banks by one year, reduces the comparability of banking performance with their global peers, according to Grant Thornton. The move will provide lenders with more time to prepare for the “potential impact on capital due to enhanced provisioning under Ind-AS,” Ashish Gupta, a director of the advisory firm said in an emailed note.