Move to leave rates ‘unchanged’ catches bankers by surprise

The Reserve Bank of India’s decision to leave the repo rate unchanged has surprised bankers and experts who expected another rate cut, given the slowing GDP growth. “The RBI decision for a status quo, though an unanticipated policy surprise, is the most appropriate as monetary policy works with a lag. The lowering of the GDP growth for FY20 and FY21 reflects continued growth conundrums and a slow recovery,” said Rajnish Kumar, Chairman, Indian Banks’ Association, and Chairman, State Bank of India.

Markets expected a 25 basis point cut in the repo rate by the Monetary Policy Committee after official data showed that the economy grew by 4.5 per cent in the second quarter of the fiscal. However, after five consecutive rate cuts, the MPC decided to maintain the status quo, given concerns about rising retail inflation.

“Although the RBI’s pause in rate cut has been against market expectations, it needs to be seen against the backdrop of a material rise in the RBI’s CPI projection,” said CS Ghosh, MD and CEO Bandhan Bank.

Abheek Barua, Chief Economist, HDFC Bank, said: “The pause in the rate cycle comes as a surprise, given the dismal growth for the second quarter of FY20 and the likely persistence of a slowdown. Clearly, the RBI has responded to hardening headline inflation and rising inflation expectations of households.”

He further noted that given the paucity of loan demand, banks are likely to chase assets and the transmission process could gain traction.

‘Transmission to improve’

Shanti Ekambaram, President, Consumer Banking, Kotak Mahindra Bank, also said the transmission process is likely to improve further, but added it is ‘interesting’ to see the pause call was unanimous for the six-member panel. According to Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers, more than inflation, the lack of transmission of rate cut seems to have been the bigger reason for the rate pause.

“We, however, expect the RBI to resume rate cut in January. We also expect FY20 GDP growth to be better than the RBI’s revised estimate,” he said.

SBI Chairman Rajnish Kumar also welcomed steps on the regulatory side, including those announced for urban co-operative banks, saying these measures will increase the confidence of the public in these lenders.

“While the incoming macro data was already making market dynamics unpredictable, now with surprises on monetary policy, markets will likely stay edgy in the near term,” noted Rajni Thakur, economist, RBL Bank.

Real estate sector

The RBI has stumped the real estate sector’s expectations by maintaining status quo.

“From a real estate point of view, rate cuts are always welcome as they help improve the overall sentiment. The expected rate cut of 25 bps would have caused home loan values to fall below 8 per cent for first time ever,” said Anuj Puri, Chairman, Anarock Property Consultants.

“However, it is also true that another rate cut alone would have been insufficient to stir housing sales significantly across budget categories.

“The previous rate cuts throughout 2019 had almost no perceptible impact on residential sales. In fact, back in 2014, even when the home loan rates were high in two-digits at 10.3 per cent, housing sales remained at peak levels.

“In the present scenario, only the combined effect of lower interest rates, coupled with other measures such as a cut in personal taxes – reportedly being considered by the FM – can actually stimulate residential sales out of their current lethargy,” he added.

“After five consecutive rate cuts in 2019, the central bank has taken a pause,” said Ramesh Nair, CEO and Country Head, India, JLL.

He further said: “The central bank, by keeping the rates unchanged, has recognised that the need of the hour is to infuse confidence about the economic growth through a holistic approach. This will come by combining fiscal and monetary measures.”