RBI Maintains Status-Quo On Policy Rates, Experts Welcome Move

RBI Maintains
Status-Quo On Policy Rates, Experts Welcome Move
The RBI governor Raghuram Rajan has maintained a status-quo on key policy rates until it brings down the consumer inflation to 6% by January 2016. The apex bank has kept the repo rate at 8%, reverse repo rate at 7% and marginal standing facility at 9% respectively.

“This continues to warrant policy preparedness to contain pressures if the risks materialize. Therefore, the future policy stance will be influenced by the Reserve Bank’s projections of inflation relative to the medium term objective (6% by January 2016), while being contingent on incoming data,” said Rajan.

However, the RBI’s decision to hold the key policy rates static has been welcomed by industry experts.

“Even though inflation has been declining, the RBI is of the view that it is too early to assume that it is firmly under control. We agree with the bank’s view and believe that under the current macroeconomic environment, this is the correct assessment,” said Sunil Kumar Sinha, principal economist and director of credit rating agency India Ratings and Research (Ind-Ra).

He explained that food inflation continues to form 60% of the overall headline inflation even though the Consumer Price Index (CPI) inflation declined in at 7.8% in August 2014. “Ind-Ra believes the RBI would rather wait than make the mistake of changing the policy stance before the inflation has been effectively tamed. We believe monetary easing will not be possible before Q4 FY15. Also, the balance of risks is still on the upside due to risks from food price shocks and geo-political developments in the middle-east,” added Sinha.

Echoing a similar sentiment, Kunal Shah, fund manager, debt at Kotak Mahindra Old Mutual Life Insurance, noted that the disinflation process is still under progress and that he expects the core inflation to remain low as the government is focusing on productivity improvement.

“RBI should remain on guard so that the objective of bringing inflationary expectations down can be achieved. We believe FY 2016 will provide RBI room to ease policy in line with inflation developments,” pointed out Shah.

Experts have also appreciated the RBI’s decision to slash the Export Credit Refinance (ECR) facility from 32% of the eligible export credit outstanding to 15%, which will become effective from October 10, 2014.

Sinha of Ind-Ra believed that the decision to cut ECR facility was taken because the liquidity in the system has largely remained balanced. “The RBI is keeping a close watch on liquidity”, he added.

Analysts have also suggested that the reduction in ECR facility is indicative of the shift away from sector-specific liquidity allocations.

In terms of sectors, economists expect the real-estate sector to be hugely benefited by RBI’s latest monetary stance. “However, given the central government’s focus on real estate and infrastructure, an unchanged policy rate will have a positive impact on the real estate sector. The confidence among consumers owing to interest rates not heading north, coupled with signs of economic revival is likely to boost the demand for real estate,” stated Samantak Das, chief economist and director of research, Knight Frank India.

Since last September, Rajan has raised the policy rates thrice and aggressively focused on reducing the inflation in the economy. He believes inflation is the biggest deterrent for economic growth. The RBI plans to contain CPI inflation at 8.0% by January 2015 and further reduce it to 6% by January 2016.