India's central bank cuts rates by 35 bps, more than expected

The Reserve Bank of India (RBI) cut interest rates by an unconventional 35 basis points on Wednesday, slightly above expectations, and its fourth cut in 2019 to boost an economy growing at its slowest pace in nearly five years.

The RBI maintained its "accommodative" stance but said further rate reductions would depend on the level of inflation.

Commentary

Rohit Poddar, Managing Director, Poddar Housing and Development Ltd, Mumbai:

"This is a welcome move by the RBI as growth has totally stagnated. In fact, there is deflation in several sectors. The RBI has cut the rate on the backdrop of evolving growth-inflation dynamics with the objective to fill the output growth gaps. Raising banks' exposure limit to single NBFC is a prudent structural development."

"Banks' lending to registered NBFCs for housing up to 20 lakh rupees per borrower is positive news for the real-estate sector. Transmission of the rate cuts to borrowers is important as wielding scissors on repo rate alone will not be enough. Additional interventions will also be required to try and provide a boost to the economy."

Devendra Pant, Chief Economist, India Ratings, New Delhi:

"The rate cut can't be called unconventional. The slightly higher-than-expected rate cut shows that there is a need for rate cuts, but the decision gives the impression that expectations of a 50 bp cut maybe too high."

"Ultimately, it will depend on how the transmission takes place. The policy even talks about the combined impact of 75 bp before this; it says overall banks reduced their weighted average lending rate by 29 bp on fresh rupee during the current easing phase so far."

"Banks are cutting on deposit rates and from whatever they are borrowing from the markets too. There will be some impact on cost of borrowing. The impact of this 35 bp cut maybe felt with a lag, it will take some time to see its impact."

Sakshi Gupta, Economist, Hdfc Bank, Gurugram:

"The cut of 35 bp is a deviation from the convention of changing rates in multiples of 25 bp. The central bank recognises the risks to growth and consequently lowered their growth forecast."

"Their projections for H2 still seem a bit optimistic. We expect the GDP growth at 6.7%-6.8% for FY20. Given that growth could continue to slow and inflation readings remain contained, there is room for more rate cuts this year."

"It was disappointing to see little clarity on whether the current liquidity situation will continue under the new liquidity management framework. The recent improvement in the liquidity situation is likely to improve transmission in the coming months."

"This policy is likely to be broadly neutral as expectations of a 50 bp cut were partly baked in. The big mover for the yields will now be any development on the sovereign bond issuance."

Aditi Nayar, Principal Economist, Icra Ltd, Gurugram:

"The unconventional 35 bp rate cut is a clear signal that increasing evidence of a pervasive slowdown in economic growth has emerged as the MPC's chief concern, given that it expects inflation to remain under its medium-term target."

"While the stance was maintained as accommodative and the tone of the outlook was dovish, we expect that incremental data will crucially guide the MPC's decisions on additional rate cuts. The focus will now shift to improving transmission to bank lending rates, with the systemic liquidity surplus in excess of 1% of NDTL."

Radhika Rao, Economist, Dbs Bank, Singapore:

"Factoring in a downward revision to growth projection and inflation expected to stay sub-target in early 2020 back the central bank's dovish bias. Indian benchmark rate cuts have been frontloaded and fallen by the most (110 bps) among Asian peers and hence the committee will prefer to be data-dependent going forward."

"With softness in incoming data, we retain our call for another 25 bp cut, likely in the next quarter. While the irregular quantum of cut surprised most, this was likely a signal that policymakers wished to do more than the routine quarter percent and hence reinforce their bias."

Shilan Shah, Senior India Economist, Capital Economics, Singapore:

"The RBI's forecast for GDP growth this year has been lowered a touch with "risks somewhat tilted to the downside". Meanwhile, the official policy stance remains "accommodative", suggesting that further loosening will follow in the near term."

"But we maintain our view that aggressive loosening will be a mistake. The GDP data are riddled with problems. Soft surveys show that spare capacity is still tight and core inflation is likely to rise over the coming months as earlier monetary loosening and expansionary fiscal measures in the union budget take effect."

"With a growing perception that the RBI's credibility as an inflation fighter is being eroded – heightened by the surprise resignation of Viral Acharya from the MPC a few weeks ago – further policy loosening raises the risk of inflation rebounding and ultimately requiring higher interest rates over the longer term."

Amar Ambani, President & Head of Research, Yes Securities, Mumbai:

"The unconventional 35 bp cut should have been seen coming, after the RBI's statement in its last policy meet to do away with 25 bp norm. Equities, however, haven't risen after the policy announcement, as a 50 bp cut was priced in the market."

"Going forward, we do believe that scope for another 25 bp cut is available to the MPC in 2019 itself. Clearly, supporting growth, which has risks to further downside, will be top of the agenda in a benign inflation environment." Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, Mumbai "The 35 bp rate cut should be seen as a signal that the Reserve Bank of India's MPC is quite concerned with the growth outlook beyond the usual 25 bp rate cut in a business-as-usual scenario, even though it does not reflect in the revised FY2020 GDP growth estimate."

"The RBI MPC did not necessarily want to deliver a 50 bp rate cut, and hence, retains the scope to reduce rates further. With inflation expected to remain benign, and further downside to growth outlook, we see scope for 25-50 bp of further rate cuts through FY2020."

"Transmission to lending rates will likely remain weak unless there is a clear visibility of adequate liquidity sustaining over the medium-term."

Suraj Kaeley, Senior Adviser at Fundsindia:

"There has been a significant slowdown in the Indian economy. It was widely expected that the RBI would cut rates to stimulate growth. Further, global interest rates are going down and there is no immediate threat on the inflation front. We welcome this move and hope that rate transmission happens at a faster pace." JOSEPH THOMAS, HEAD RESEARCH, EMKAY WEALTH MANAGEMENT, MUMBAI "The RBI policy, especially the repo rate cut of 35 bp, takes cognizance of the need to bring down interest cost on liquidity and credit, to support the sluggish economic growth and to stimulate aggregate demand."

"The success of this accommodative policy would depend entirely on the next level of its application, that is, the transmission of lower rates to the ultimate borrowers. The banks seem to be seized of this need and effective cascading of the benefits of lower base rate may happen over the next few months."

Anagha Deodhar, Economist, Icici Securities, Mumbai:

"I think deviation from the standard practice of changing rates by 25 bp is welcome. In the current situation, 25 bp would have been insufficient and 50 bp would have been too aggressive. Growth and inflation are expected to pick up modestly in H2FY20. We expect inflation to cross 4% in November 2019. Hence, we could expect only one more rate cut this fiscal."

"Banks have already started cutting lending rates. However, the lending rate cuts are much smaller than reduction in repo rate, indicating significant room for transmission."

Rupa Rege Nitsure, Chief Economist, L&T Financial Holdings, Mumbai:

"The RBI has done the maximum that a central bank can do in the current phase of economic slowdown."

"By significantly revising downwards the GDP growth for H1, FY20, it has signalled the concerns on the growth front. However, the weight of structural factors has increased in India's ongoing slowdown and it is now absolutely essential for the central and state governments to work in partnership to resolve some of the sticky sector-specific issues and concerns."

Shubhada Rao, Chief Economist, Yes Bank, Mumbai:

"Welcome the 35 bp rate cut. Growth is likely to be revised down further from 6.9%. Given the well-anchored inflation, we believe that the RBI is set to cut rates in the next policy review in October. It could be 15/20 bps also. It is clear that reviving growth has received most attention."

Sujan Hajra, Chief Economist, Anand Rathi Securities, Mumbai:

"The 35 bp rate cut is higher than the consensus and our expectation of a 25 bp rate cut. This clearly shows the RBI's concern about growth performance and outlook, and the urgency to take measures to revive growth."

"The real issues, however, are improving monetary policy transmission and reviving the NBFC sector; the policy does not provide any new measures or even perspectives on these areas."

"With 110 bps cumulative rate cuts, banks would be under moral pressure to cut lending rates, which can depress NIM. This is negative for the sector and positive for interest-sensitive sectors."