Monetary Policy - Economists’ View: No Rate Cut But Guidance Of Lower-For-Longer Rates

India’s Monetary Policy Committee kept interest rates unchanged at its review on Friday, in line with economist expectations. The committee, however, maintained an accommodative stance, with five of the six committee members voting to hold that view into next financial year.

The central bank also provided its growth and inflation forecasts for the first time since the outbreak of the Covid-19 crisis. The central bank sees the Indian economy contract 9.5% in FY21, with a downside bias to those forecasts. It expects inflation at 5.4-4.5% in the second half of FY21 and 4.3% in the first quarter of next year.

The central bank’s inflation and growth forecast, in line with economist expectations, bring greater clarity to future policy action, said economists. Most see limited chance of further rate cuts but expect the MPC to hold rate for longer. They also see continued support from the RBI in the form of liquidity and government bond purchases in the secondary market.

Saugata Bhattacharya, Axis Bank

While the central bank’s guidance was very dovish, as expected, the growth and inflation projections estimate will help guide future policy action, said Bhattacharya, chief economist at Axis Bank.

But in this MPC, more than the others, there is a very tacit, implicit signal of growth concerns. The implicit stimulus from the range of additional measures is close to that provided by the European Central Bank, he said. Bhattacharya also called the central bank’s decision to buy state government bonds in the secondary market, “a path breaking move.”

It is a very supportive policy, said Bhattacharya. Non-disruption of bond markets has been a constant motive throughout. The central bank is very serious about spending money to get growth up, he said.

Rahul Bajoria, Barclays

Bajoria, chief economist at Barclays, said the October statement indicates that the August statement and the accompanying minutes were somewhat of an aberration. In August, the committee had cautioned about inflation risks and the minutes showed that some members were worried about a trend of inflation remaining above the MPC’s target of 4 (+/-2)%.

“...while scope for large cuts remains small, real policy support will continue to come from unconventional or extraordinary policy steps,” said Bajoria.

The guidance focused on ensuring a non-disruptive borrowing program for fiscal financing, scaling up the size of OMO purchases, the introduction of on-tap TLTROs for corporates, extending HTM limits for banks, introducing open market purchases of state bonds, and reducing risk weights for home loans are all steps that are aimed at alleviating funding pressures across the economy, Bajoria said.

Pranjul Bhandari, HSBC

Bhandari, chief India economist at HSBC, said the RBI was as accommodative as it can possibly be without cutting rates.

“While the repo rate was kept unchanged, as expected, at 4%, the commentary was more dovish than before, accompanied by a slew of market and regulatory steps,” Bhandari said.

According to HSBC, the RBI had three objectives in mind -- putting the growth objective right on the top; keeping a lid on risk-free rates; incentivising banks to go out and lend more.

Suvodeep Rakshit, Kotak Institutional Equities

The resolution and the commentary was in line with what the markets have been expecting, said Rakshit, senior economist at Kotak Institutional Equities. The growth and inflation forecasts are welcome and in line with expectations, he said.

"While we knew by the previous policy itself that a rate cut is not coming even in December, by February, we will have inflation closer to 4-4.5%. Growth, demand conditions will indicate if rate cut necessary in February," Rakshit said.