Monetary policy: What they say

Sonal Varma, India Economist, Nomura Financial Advisory and Securities:

“Today’s policy decision came in largely along expected lines. In our view, while the recent rise in inflation may have been a catalyst in the decision to hike repo rate, an equally important reason, is an implicit change in the RBI’s monetary policy framework, away from WPI inflation towards CPI inflation. This framework suggests that given current high CPI inflation, the present repo rate has been persistently below the neutral rate — i.e. monetary conditions have been too loose — so recent repo rate hikes are intended to align interest rates to ‘real’ domestic inflationary conditions.

"‘Stealth tightening’ (by making the MSF rate the operative rate) was used as a bridge to this new framework. Looking ahead, we believe that the repo will be made the operational rate once oil demand is brought back to the market and repo rates are hiked to a “reasonable level” to ensure a positive real return to savers. With CPI inflation close to 9.5 per cent and deposit rates in an 8-9 per cent range, positive real return to savers still calls for a further hike in repo rate, unless CPI falls sharply, which appears unlikely at the moment. We pencil in another 25 bps hike in repo rate to 8 per cent by March 2014.

"The increase in term repo liquidity is a positive surprise and puts the outcome of this meeting on the dovish side of market expectations. The effect of this is equivalent, we estimate, to infusing Rs 19,000 crore of liquidity on a daily basis. Effectively, this brings down the average funding cost of the banking system and is hence supportive of our bullish bias on India rates.''

Naresh Takkar, MD & CEO, ICRA Ltd:

“The RBI as expected hiked the repo rate by 25 bps to respond to the uptick in inflationary expectations and guard against a generalisation of inflationary pressures, since factors other than high interest rates, such as structural constraints have also contributed to anaemic growth.

"Given the inflationary expectations for the rest of the year, we believe that the RBI could increase the repo rate again by 25 bps during the second half but provide liquidity using other monetary tools at its disposal.”

Dipankar Mitra, Chief Economist & Senior V-P-Research,Motilal Oswal Securities:

"By cutting the MSF rate by 25bps and raising repo rate by the same magnitude RBI’s monetary measures involved a rationalisation of the rates that leave cost of funding relatively unchanged for the banks at the margin.

"On the other hand, liquidity enhancing measures to make available another Rs 20,000 crore in the term repo segment would make more funds available to the banks at market determined rates and would also help develop this market.

"The RBI has cut the GDP growth rates to 5% from 5.5% earlier on expected line. However, unlike in the past the commentary remained silent about any revision in the Mar-14 WPI inflation estimate. Reading the fan chart would make it appear that RBI has revised its estimate to 6.5% from 5%. This opacity in inflation projection could have been avoided. On the other hand, RBI for the first time introduced a CPI estimate and provided an explicit guidance of it remaining at 9%. This marks a shift in greater weight of CPI measure in overall assessment of inflation for RBI.

Yadnesh Chavan, Head of Fixed Income, Mirae Asset Global Asset Investment Management

"The overall policy stance is focused about persistent inflation and inflationary expectations going forward. We expect overnight rates will be near to MSF rates because of the cap on repo. The overall short term rates are expected to come down after this policy.

"The overall rate hike decision will impact the longer end of the curve adversely. We expect the benchmark 10 year GOI to be range bound between 8.20% to 8.70% with upward bias mainly because of high supply of government debt going forward, high currency in circulation in festive season, potential fiscal concerns because of approaching general elections."

* Lakshmi Iyer, Sr. Vice President and Head, Fixed Income, Kotak Mutual Fund

“The policy move by RBI came on expected lines and indicated a return to the normalcy of the pre-June 2013 period. It is evident from the stance that improving systemic liquidity and managing inflation are now the key policy objectives driving the central bank’s decision. This could see the yield curve flattening further, going ahead.

"Having said that, despite a good kharif season, the money velocity in the agri-sector may be imposing a high price floor for the agri commodities. As a result, the inflation may not moderate in a hurry and may require further policy measures going ahead.”

* Dinesh Thakkar, Chairman & Managing Director, Angel Broking

“The positive from the policy was that at least the short-term rates will come down further possibly by about 50-75 basis points. This will reduce possibilities of broader lending rate hikes by banks for the time being. The markets will now be more interested in seeing if inflation comes down in coming months due to cooling down of food prices. This would pave the way for a more sustained declining trend in interest rates and eventual revival in investment and growth rates.

"The other important ongoing catalyst for markets remains the currently resurgent export growth. So, this policy may give a short-term boost to rate sensitives, but further rallies in cyclicals will hinge on improvement in growth-inflation dynamics.

"Meanwhile, export-oriented stocks are expected to continue doing well in the near-term, and so are high quality stocks that have strong enough fundamentals to weather the current macro headwinds. Within cyclicals as well we would continue to prefer high quality stocks in private banking and engineering space.”

* Amar Ambani, Head of Research, India Infoline Ltd. (IIFL)

“With currency stabilising post significant abatement of external sector risks and raising of limit along with swap for FCNR-B deposits, the Central bank further reduced the MSF rate by 25 basis points to 8.75 per cent. While CRR was left unchanged, RBI facilitated banking system liquidity by doubling the cap of 7-day and 14-day term Repos to 0.5 per cent of banking system NDTL. This along with reduction in MSF rate would further soften short-term rates in the coming months.

"This would more substantially benefit Yes Bank, IndusInd Bank, Axis Bank, ING Vysya Bank and ICICI Bank, whose reliance on bulk deposits is significant. Even NBFCs such as LIC Housing Finance, M&M Financial and Shriram Transport Finance would stand to gain.

"RBI’s hawkish policy stance is likely to continue with WPI inflation firming up and persistence of elevated retail inflation.In Central bank’s own assessment, WPI inflation is expected to remain higher than current levels in remainder of the fiscal and consumer inflation is expected to sustain around 9 per cent notwithstanding some moderation in food inflation if no policy measures taken. We believe that the RBI would hike Repo rate by another 25bps at least in the remaining part of the year.”

* Dr. Samantak Das, Chief Economist & Director Research, Knight Frank India

“RBI has once again shown its stance towards curbing inflationary pressures. By doing so, there is a substantial compromise being made towards the country’s GDP growth. Since the mid-quarter review in September, global economies have shown firming up of activities and as a result, Indian exports have shown an upward trend.

Additionally, the exchange rate has shown stability and agricultural output is expected to improve even further, in the coming months. Keeping this in view, the Central Bank could have adopted a wait and watch approach by deferring the repo rate hike. This could have helped various sectors including real estate to capitalise on the positive consumer sentiment ahead of the festive season to propel growth”.

* C Shekar Reddy President CREDAI-National

“Considering the overall economic situation and challenges being faced by the industry, we were looking forward to the reduction in repo rates, to ease the burden on the buyers and developers. The continuation of the policy to increase in repo rates in the monetary policy, to control the inflation, will be further increasing the problems of the developers who are grappling with high interest rates. We were hopeful that besides easing the liquidity, RBI will start addressing the industry concerns for growth and give the necessary impetus.”

“According to Housing and Urban Poverty Alleviation (HUPA) estimates present housing shortage is 18.7 million units with almost 96 per cent shortage in the shelter for Economically Weaker Section (EWS) and Lower Income Group (LIG). There is an expected total housing requirement of 60 million units by 2030 in India.

"RBI should consider increasing the exposure to Commercial Real Estate (CRE) segment from 3 per cent to at least 12 per cent and encourage the funding of SME projects in tier I, tier II and tier III towns and cities to boost the segment. We are keen on meeting the RBI Governor to table and discuss the concerns of the Real Estate sector.”

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