Report on Monetary
Policy - A “sweet” masala mix by Mr. Sujan Hajra(Chief
Economist- AnandRathi Financial Services Ltd)
Rajan once again surprised the market with a 50-bp rate cut, against the consensus
25-bp cut. The RBI now expects inflation to fall to 5.8% in Jan’16 and 4.8% in
Jan-Mar’17. If this downshift plays out, there is room for another 50- to 75-bp
rate cut in 2016. The Governor also indicated a shift in focus from policy
rates to greater transmission of these rates. The move will be positive for
interest-rate-sensitive segments: durable and capital goods, but negative for
the public-sector banks.
Policy rate slashed
rate by 50bps. Governor Rajan continued with his approach of surprising the
market, with a 50-bp cut in the policy rate today. As forecasts suggest, the
RBI is expecting a modest softening in growth and a prolonged period of low and
falling inflation in 2016. With these views, he “front-loaded” the rate cut.
Incidentally, this is the first 50-bp rate cut in three years (since Apr’12).
In addition, the RBI maintained a largely dovish stance in its monetary-policy
and inflation projections. With the cumulative 125- bp policy rate cut in 2015
so far, we feel that further lowering of the policy rate this year is unlikely
unless inflation and/or unexpectedly growth soften. At the same time, the RBI
expects CPI inflation to fall from 5.8% in Jan’16 to 4.8% in Jan-Mar’17. If
this pans out, we expect another 50- to 75-bp rate cut in 2016.
equity market immediately cheered the reduced policy rate. The governor
indicated a shift in focus from policy rate cut towards greater credit market
transmission of the cuts already effected. This too would lead to further gains
in the equity market, especially in interest-sensitive segments such as
construction, capital goods, consumer durables including auto and real estate.
The stance could potentially be negative for banks, however, particularly
public-sector ones with, inter alia, high cost-to-income ratios, higher
credit costs and mounting employee compensation due to the recent 15% wage
announcements today also largely support the debt market, with the raising of
the foreign investment ceiling for Government of India securities and a
separate cap for foreign investment in state government securities. There are
liberalisation measures for foreign investment in corporate debt as well. The
reduction of SLR requirement is a potentially negative factor for the
government-securities ratio; the progressive increase in the liquidity-coverage
ratio under the Basel III requirements is a positive factor. And this impact is
likely to be trivial.