Experts see room for rate cuts in 2nd half of FY'17

Terming the RBI's move to maintain status quo in its monetary policy as "predictable", experts today expressed hope that the central bank would cut repo rate in the second half of the fiscal, taking cues from moderate inflation and the government's reform initiatives.

Reserve Bank's decision to leave policy interest rates unchanged today was no surprise to market participants, in line with transparent and predictable monetary policy, Moody's Investors Service said in a statement.

"In the next few months, we expect continuity in the RBI's policymaking. We do not expect RBI's shift to such a structure to have any significant implications for the conduct of monetary policy," said Marie Diron, Senior Vice President, Sovereign Risk Group, Moody's Investors Service.

Reserve Bank Governor Raghuram Rajan today left interest rates unchanged in his last monetary policy review as inflation hit near 2-year high but said the central bank's stance remains "accommodative".

Expecting "upside" risk to his March inflation target of 5 per cent due to pay hike of central government employees following the 7th Pay Commission and sticky core inflation, which excludes food and fuel, he kept benchmark repurchase rate at 5-year low of 6.50 per cent.

The larger than average monsoon rainfall will help maintain moderate food price inflation, contributing to keeping headline inflation within or close to target this year, Moody's said.

SBI Chairman Arundhati Bhattacharya said, "The RBI's decision to maintain status quo was as per market expectations. The decision to frontload liquidity provisions through an announcement of Open Market Operations (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," she added.

Yes Bank CEO & MD Rana Kapoor said, "In the coming months, the disinflationary impact will be upheld by a favourable monsoon and structural policy reforms instituted by the government.

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Kapoor further said that notwithstanding the current pause, disinflationary impact along with reform initiatives will engender 50-100 basis points space for incremental monetary easing before the end of 2016-17.

Shanti Ekambaram, President - Consumer Banking, Kotak Mahindra Bank said, "While risks of inflation remain, a host of positive factors, easy global liquidity and ample domestic liquidity indicate downward trajectory of interest rates in the second half of 2016-17."

The RBI governor today said risks to the March 2017 target of 5 per cent for headline inflation, which climbed to a 22-month high of 5.8 per cent in June, "continue to be on upside" on factors like food inflation, services and the effect of the seventh pay panel implementation.

Sunil Kumar Sinha, Principal Economist, India Ratings & Research, said, "As expected, the RBI kept the policy rates unchanged in the third bi-monthly policy review of 2016-17. Risks to the inflation outlook seem to be tilted to the upside and a status quo on policy rates has been the correct stance."

Naresh Takkar, MD & Group CEO, ICRA said, "Under the unaltered inflation targeting framework, we expect lower consumer price inflation inflation in October-December to create space for additional monetary easing of 25 basis points in 2016, which should contribute to a further fall in yields of Government securities and commercial paper.