What are fund managers saying about the RBI's bi-monthly monetary policy

03 August, 2017, 01:04 | Author: Valerie Burke
  • RBI RBI policy repo rate

The six member monetary policy committee (MPC), headed by new RBI governor Urjit Patel, were of the view that the moderation in price trends have persisted long enough to warrant lower loan costs, necessary to engineer a quick industrial turnaround and goad people to spend more.

The MPC has the mandate of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of 2 per cent either way.

This is the first cut in key policy rates since October 2016, which was Urjit Patel's first monetary policy outing since taking charge as the RBI Governor.

Upside risks to inflation may however play the spoilsport.

"The cut in repo rate by the RBI is pro-growth".

While the RBI has enough reason to pull up banks on the base rate front, citing transmission issue with the MCLR may, at first glance, appear overdone going by data alone.

Proponents of more rate cuts argue these would make loans cheaper and help companies refinance their debt, while potentially helping reduce some of the $30.3 billion in capital inflows into stocks and debt markets lifting the rupee by 5.6 percent against the dollar this year. This adds further comfort for the interest rate cycle to remain in a neutral mode with an outside chance of further easing before April'18 policy.

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Policy rate or repo rate was cut by 0.25 percent to 6 per cent.

The central bank has now reduced the repo rate by 175 basis points since December 2014, however, reduction in lending rates by banks have not been in line.

Under the earlier base rate regime (for borrowers before April 2016), changes in lending rates happened slowly, making it hard for lenders to transmit RBI's rate cuts.

The central bank has previously warned that inflation could accelerate due to a seasonal rebound in food prices and factors such as planned pay hikes for government employees.

One basis point is one-hundredth of a percentage. It might lead to banks reduce their lending rates, thereby, giving an impetus to credit growth, which has been down compared to previous year. Yes Bank MD and CEO Rana Kapoor said: "India's inflation has undergone a structural shift, with the emergence of "new normal" at lower levels".

Deepak Kapoor, President CREDAI-Western UP & Director, Gulshan Homz: The realty sector welcomes the repo rate cut by RBI today which is further expected to fuel the demand as the EMIs are expected to fall even more.

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