Path of monetary easing to be now guided by pace of fiscal reforms with near-term focus on expenditure restructuring
The Reserve Bank of India (RBI) left interest rates unchanged for the second time since June, in line with expectations, while cutting its growth forecast and lifting its inflation outlook as economic conditions deteriorate.
Here is what experts have to say about the policy review today:
Suresh Kumar Ramanathan, CIMB, Kuala Lumpur
"An overall hawkish stance with the bare minimum being done by RBI, particularly the SLR cut by 100 bps. The communique is targeting inflation and its appropriate they did not cut the policy rates. GDP growth reduced is in line with our expectations that India's macroeconomic dynamics -- trend growth and C/A balance is deep in negative macroeconomic dynamics.
"We see further rate cuts will be measured and with inflationary pressures intact, calling for further rate cuts will remain a gamble. Any form of easing should be seen from the angle of currency softness, that will help reduce the current negative macro dynamics that India is facing."
Shakti Satapathy, AK Capital, Mumbai
"Today's action was no more a surprise for the market. A non-event reflects the central bank's prudent effort in controlling the inflationary expectation and leaves the growth onus in the government's hand. Further cutting down the SLR would have little impact on the overall systemic liquidity and would negatively weigh on the government securities market in the near term.
"The path of monetary easing would henceforth be guided by the pace of fiscal reforms with near-term focus on expenditure restructuring. A delayed response from the government's end might handicap the quantum of rate cut in the forthcoming policy meet."
Anubhuti Sahay, Standard Chartered Bank, Mumbai
"The Reserve Bank of India struck a hawkish stance in its monetary policy statement. Once again, containing inflation and inflationary expectations have been highlighted as the priority.
"On economic growth, though the moderation has been noted, the RBI sees limited role of rate cuts in stimulating growth. Overall it affirms our view that any rate cut from the RBI is unlikely in rest of 2012."
Darius Kowalczyk, Credit Agricole CIB, Hong Kong
"We believe that the inflation revision is more important and will make it more difficult to cut rates, but we maintain our call for a modest 50 bps in cuts later this year in the face of significantly below-target growth. Importantly, the RBI highlighted India's challenges without offering a clear path to overcoming them, which will be negative for market sentiment.
"Overall, the impact of the meeting will be improved liquidity due to the SLR cut, higher INR OIS rates and bond yields due to lower chances of rate cuts, and lower equities as a combination of weaker growth forecast and more elevated inflation call is not supportive. The INR should fall on lower chances of monetary policy stimulus due to upward inflation revision and on negative comments on growth outlook and twin deficits."
Sachidanand Shukla, Enam securities, Mumbai
"By raising the inflation projection, the Reserve Bank of India is giving out a message that it will remain hawkish in the near term, unless supply-side and fiscal measures are taken.
"The cut in banks' statutory liquidity ratio is a re-assurance that the RBI will remain true to its stance of maintaining adequate liquidity in the banking system. The move takes advantage of the low credit demand at present."
Radhika Rao, Forecast PTE, Singapore
"An expected decision on the repo and CRR, with the move to trim the SLR intended to free-up funds for lending purposes and channelized into the real economy. This step could also lower corporate borrowing rates and prevent crowding out of the private sector.
"RBI meanwhile has made it abundantly clear that price stability will be in focus, especially as the effectiveness of the monetary policy signals are distorted by an expansionary fiscal stance.
"The broad strokes of the post-policy comments are broadly similar to the ones expressed in June, with pressure to build on the government to at least undertake baby-steps towards fiscal consolidation."
Even though the final guidelines on priority sector lending (PSL) was released over a fortnight ago, the Reserve Bank today said it is open to ...