The Reserve Bank of India on Thursday cut interest rates by 25 basis points in a widely expected move, while also changing its monetary policy stance to “accommodative” after the economy grew at its slowest in over four years, Reuters reported.
Repo is the rate at which the central bank lends to commercial lenders, and the cut signalled a drop in cost of funds for corporates and individual borrowers though domestic banks have not been very efficient in quickly passing on the benefits of past rate cuts to their customers.
This was third rate cut in a row by the central bank, and the move was largely in line with Street expectations.
Here’s how Dalal Street analysts and economic reacted to the third straight rate cut:
Naveen Kulkarni, Head of Research, Reliance Securities
While the rate cut of 25 basis points was in line with our expectations, concerns over growth and challenges regarding liquidity continue to linger. The market is not necessarily cheering the rate cut as it had already factored in and something more was expected.
Rupa Rege Nitsure, Chief Economist, L&T Financial Holdings
Today’s policy actions are perfect and give a clear signal that the RBI will continue with easy monetary conditions until it sees a definite improvement in growth-inflation mix. Transmission will happen meaningfully if the banking system witnesses surplus liquidity conditions for a sizeable period and if the RBI undertakes confidence boosting measures for the NBFC sector.
Devendra Pant, Chief Economist, India Ratings
By changing its stance, the RBI has communicated to the market that the growth slowdown is real. A working group on liquidity is a welcome step. With system liquidity in surplus mode in the past few days, lending rates should come down. The forthcoming budget is the real test for the government. The government has to find money for social spending and undertake some hard reforms to improve tax collection and adhere to the fiscal consolidation trajectory.
Garima Kapoor, Economist, Elara Capital
Drawing comfort from consistent softness in inflation trajectory, MPC cut policy repo rate for the third time this year to support benign growth conditions. A shift in the stance to accommodative is welcome as it will pave way for transmission to lending rates, which so far have been inadequate. We expect MPC to cut rates by an additional 50 bps through the year while continuing to fine tune liquidity support through a combination of OMO purchases, forex swap and CRR cut.
Romesh Tiwari, Head of Research, CapitalAim
The downward revision of GDP growth reflects concern over slowdown and supports shifting of RBI stance to accommodating policy. We expect banking shares to remain strong in the midterm while NBFCs may further correct before consolidating. Largely market will not be driven by this news. Current valuations do not justify Nifty and Sensex and are due for a correction soon. Now all the eyes will be on the Budget session which may bring some big measures for revitalizing the economy. Short term target for Nifty is 11,880 and breaking below that may take the Nifty 11,660 levels in the medium term.
Shishir Baijal, Chairman & Managing Director, Knight Frank India
The first rate cut in the newly elected government regime is certainly a welcome step, especially for the real estate sector.The cash-crunched NBFCs will definitely benefit from inflow of capital which will in turn benefit developers as well as home-buyers. NBFCs have been facing a liquidity crisis and this has negatively impacted their loans to real estate, including construction finance. Besides capital infusion into this important financier segment, this rate cut will also improve the home-buyers affordability and stimulate housing demand at this critical juncture.
Deepthi Mathew, Economist, Geojit Financial Services
It was not a surprising move, as there was a lot of pressure on the RBI for a rate cut, with the GDP growth registering one of the lowest rates in the last quarter of FY 2018-19. The market has even expected a rate cut by 50 basis points. The Central Bank has also revised the CPI inflation to 3.0-3.1 percent from the earlier 2.9-3 percent for H1FY20. The rising food prices are one of the major factors for the upward revisions in the CPI inflation rate. Food and beverages registered a growth rate of 1.38 percent in April, with vegetables prices registering a growth rate of 2.87 percent in April from a negative growth rate of 1.49 percent in March.
Joseph Thomas, Head Research, Emkay Wealth Management
The RBI policy is exactly on the lines expected by most of the market participants. The repo rate cut of 0.25% and the change of stance from ‘neutral’ to ‘accommodative’ is key to supporting the sagging economic growth. The projected growth has been lowered to 7%. The policy also has broad indications of more actions on the liquidity front from the RBI in the coming days. This also confirms the commitment of the central bank to better transmission of the rate-cut effects through liquidity.
Mustafa Nadeem, CEO, Epic Research
The RBI is now keen on looking to improve growth trajectory since the ongoing liquidity crisis has hurt the cost of borrowings, and further stressed the system. The distress in rural demand and near-monsoon prediction has also put some stress since it can push inflation a bit higher. The trajectory stated by RBI is at 3 – 3.1%. The accommodative stance is now focused on the liquidity and concerns over it. The cost of borrowing is now one concern that needs to be stressed and banks would /should likely to pass the benefit to end consumer. RBI has also put a stance further that it may take necessary actions that will help to keep financial stability.
(With inputs from Reuters)
Source: Economic Times