RBI cuts repo rate by 25 basis points

Mr. Mihir Vora- Director and Chief Investment Officer, Max Life Insurance.

The RBI has cut the Repo -Rate by 25 basis points, as per our and consensus expectations. Moreover, it has narrowed the policy rate corridor by: a) increasing the Reverse-repo rate from 5.75% to 6% and b) reduced the MSF rate from 7.75% to 7%. Thus the corridor has compressed from 2% to 1%.

More importantly RBI has announced that it is comfortable to move the system liquidity to neutral from the current situation of consistently negative liquidity. This means that the operating rate could potentially move from the current 6.75% (because of consistently negative balance of liquidity) to 6% i.e. the reverse-repo rate over a period of time. 

These moves reduce the short-term stresses that banks are facing due to fluctuations because of seasonal or global factors. It hence provides incentive for banks to lend more freely and could encourage credit growth. Lower volatility in the money market rates and the measures to move bank lending rates to the MCLR (Marginal Cost-based Lending Rate) regime will help better transmission of the 150 basis cumulative rate cuts that the RBI has done over the past 18 months. 

RBI is comfortable with its projections of inflation trending towards 5% by March 2017 and has also maintained GDP growth projections of 7.6% by March. RBI has also commented positively on the direction that has been set in the Budget and other Government actions. 

We expect another 25 to 50 basis point rates during the current financial year, more likely in the second half.

Mr. Naresh Takkar, MD & Group CEO, ICRA Ltd.

As anticipated, the Central Bank chose to restrict the Repo rate cut to 25 bps in its April 2016 policy rather than front loading a larger rate cut. In our view, the quantum of the rate cut is appropriate, in light of continuing uncertainty to the inflation trajectory posed by factors such as the upcoming monsoon and pay revision, and unfolding improvements in the transmission process following the cuts in small savings rates and implementation of the new Marginal Cost of Funds based Lending Rate (MCLR) regime by banks with effect from April 1, 2016. The continued description of the monetary policy stance as accommodative lends a modestly dovish tilt to today’s policy statement, suggesting that the RBI would reassess the space for further easing once the risks to the inflation outlook recede. Nevertheless, it is premature to gauge whether further space for monetary easing will materialize as the fiscal year progresses. We continue to expect growth of GVA at basic prices to improve to 7.7% in 2016-17.

The overarching focus on smoothing systemic liquidity is a positive development, which should support the transmission process. The halving of the policy rate corridor and the change in stance on maintaining systemic liquidity closer to a neutral position rather than a deficit would also aid in softening interest rates, at least in the short term.

Mr. Kapil Wadhawan, CMD, DHFL on RBI Monetary Policy.

“The first monitory policy for the current fiscal has started on a very positive note. The rate cut of 25 bps taking the cumulative rate cuts to 150 basis points over the last 15 months has sent a strong signal to see the system moving towards lower interest rate regime. The Government’s step announced in Budget 2016 taking the bold initiative of lowering the small saving rate has also given greater thrust in sustaining this sentiment in the economy.

The monetary policy has addressed the liquidity constrains of banks by assuring a near neutral liquidity deficit through open market operations. In the back drop of Marginal Cost System introduced for banks recently, RBI has shown its keenness to reduce the time lag and allow interest rate gains to pass on in the economy to boost demand and supply.

We in the Home loan industry will be proactive in passing on the benefit of lower cost to the end borrowers and look forward to a very robust growth in the demand from retail home loan borrower. The Governments initiatives on Affordable loan too can gain substantially from this trend in lower interest cost.”