The decision of RBI to keep rates on hold was on expected lines according to bankers, economists and market experts.
Arundhati Bhattacharya, Chairman, of India’s largest bank SBI said, “The RBI decision to maintain status-quo was as per market expectations. The decision to frontload liquidity provisions through an announcement of OMO is a well thought out move as capital flows have been relatively slow this year given the global uncertainties, resulting in lower net foreign exchange acquisition. We believe transmission of rates will happen gradually over the next few months as credit growth picks up pace.”
Bankers also expected higher volatility in fixed income yields.
Melwyn Rego MD & CEO, Bank of India , said “Above normal monsoon is another positive, in addition to assurance by RBI about liquidity, which would bring down the inflation, though the policy mentions that risk to the inflation target of 5 per cent for March, 2017 continues to be on the upside. This indicates possibility of range bound volatility in fixed income yields depending on emerging inflation expectations.”
Market experts are expecting a minimum of 25 bps rate cut by the RBI this fiscal.
Kunal Shah, Fund Manager, Debt at Kotak Mahindra Old Mutual Life Insurance said “We see RBI cutting rates by 25bps in current financial year. Persistent global weakness and softer commodity pricing may further open up the space. From bond markets perspective, the accommodative stance, open market operations (OMO) & softer global yields will continue to pull yields down.”
Pranjul Bhandari Chief Economist, India HSBC Securities & Capital Markets India concurred “Today's element of surprise came from its commentary on liquidity. While current liquidity is broadly in balance, the RBI believes that so far only 40% of the "structural" liquidity deficit has been eliminated by its bond and dollar purchases. This suggests that more bond purchases are likely to follow, with one announced just today. If rains are sufficient, we expect a 25bp rate cut in the 4Q.
Some said that rate cut was based on the premise of a dovish monetary policy committee rather than inflation. Sonal Varma of Nomura said “ As such, we pencil in a 25bp cut in Q4 2016 but assign only a 65 per cent probability to it, as it is largely centred on the expectation of a dovish monetary policy committee (MPC) and RBI governor, rather than an undershoot of inflation.”