Bankers, Economists See Limited Room For Rate Cuts This Fiscal

The Reserve Bank of India (RBI) kept its repo rate unchanged at 6.25 percent for a third consecutive policy on Thursday as it continues to guard against accelerating inflation.

The central bank, however, raised the reverse repo rate by 25 basis points to try and bring market rates closer to the policy rate at a time when surplus liquidity conditions persist.

"The objective is to more finely align the money market rates with the policy rate, bring down volatility and create conditions for improved transmission of monetary policy across the whole spectrum of interest rates," RBI Governor Urjit Patel said.

Incoming data will determine the future course of action, the governor said at the media briefing in Mumbai after the announcement of the monetary policy, adding that the shift from accommodative to neutral is adequate for now.

Most bankers and economists welcomed the steps taken by the RBI to address the surplus liquidity in the system, saying that it has not made use of any ‘blunt tools' to solve the issue. The rate cutting cycle from the central bank ‘is over for the near future', they added.

Policy Hawkish, SDF Prefered Choice To Curb Liquidity: HDFC Bank

Abheek Barua of HDFC Bank said the policy was hawkish, along expected lines, and validated the shift in the central bank's stance to neutral from accommodative.

According to him, the Standing Deposit Facility (SDF) framework seemed to be the RBI's preferred choice to curb liquidity, even though it also talked about conventional measures such as the Market Stabilisation Scheme (MSS).

Also Read: No New Bad Loan Resolution Plan Yet, But The Promise Of One

RBI Confident Of Growth, Worried About Inflation: JPMorgan

The central bank is more hopeful that India's growth accelerates next year and has therefore become more cautious about its inflation trajectory, according to Sajjid Chinnoy, chief India economist at JPMorgan. That said, he expects the RBI to hold rates in the near future.

Like Barua, Chinoy believes that the RBI's commentary indicates its preference for the SDF as the preferred mode to tackle excess liquidity.

Achieving Inflation Target Of 4% ‘A Big Challenge': Bank Of America

The Narendra Modi government's decision to withdraw old currency notes of Rs 500 and Rs 1,000 and the influx of foreign inflows aggravated the surplus liquidity situation in the country, Jayesh Mehta, country treasurer at Bank of America, said. He added that the RBI's signal that it will not immediately use the cash reserve ratio (CRR) as a measure to tackle the liquidity problem should provide comfort to the market.

Achieving its 4 percent medium-term inflation target will be a big challenge for the central bank, Mehta said.

RBI May Pause For Next Six Months: CRISIL

Dharmakriti Joshi, chief economist at CRISIL Ltd., believes that the emphasis of the central bank to meet the medium-term inflation target has put an end to its rate-cutting cycle. The RBI may keep the rates at the current level for at least the next six months, he said.

Also Read: Farm Loan Waivers Pose Risks To Inflation And Credit Discipline: Urjit Patel

No Rate Cut For Next Six Months: SBI

That expectation is reiterated by Rajnish Kumar, managing director of State Bank of India, who ruled out a rate cut for the next six months, given the RBI's focus on tackling inflation.

He believes a hike in reverse repo rate will help improve banks' earnings in the short term.

SBI Chairman Arundhati Bhattachary said in an emailed statement that the decision to stay put on the repo rate was along expected lines.

Focus On Bad Loan Resolution Will Renew Confidence: ICICI Bank

The RBI's focus on bad loan resolution will help renew confidence and boost investment and aggregate demand, ICICI Bank's Managing Director and Chief Executive Officer Chanda Kochhar said in an emailed statement.

The proposal to allow banks to invest in Real Estate Investment Trusts and Infrastructure Investment Trusts will help expand and deepen domestic financial markets, she added.

Yes Bank's Rana Kapoor reiterated that the RBI's measure will help ease the liquidity situation. Unlike most bankers and economists BloombergQuint spoke with, he believes that the RBI has room to ease rates.

Bad Loan Resolution Will Help Revive Credit Demand: UCO Bank

The central bank's emphasis on resolution of issues related to bad loans will give a filip to credit demand, said MD and CEO, UCO Bank,Ravi Krishan Takkar. The central bank's inflation and growth targets are in line with expectations, he added.