The big story for market is not RBI’s status quo on rate, it’s something else
NEW DELHI: The Reserve Bank of India (RBI) surprised the market yet again on Wednesday by keeping the policy rate steady for the second time in a row when the consensus projection was for a 25 bps rate cut.
The story does not end there. The big story is the change in stance by the central bank from accommodative to neutral – which in simple words means we mean the rate cut cycle may be over for now.
Analysts say, more than anything else, this change of policy stance might hurt market sentiment.
RBI said the Monetary Policy Committee (MPC) of RBI decided to change the stance from accommodative to neutral to assess how the transitory effects of demonetisation on inflation and the output gap play out.
“The market has clearly been taken in by a rude shock as RBI has changed its stance from accommodative to neutral. This was something the market had not factored in,” Ajay Bodke, CEO & Chief Portfolio Manager - PMS at Prabhudas Lilladher Private, told ETMarkets.com.
“The scope of further rate cut in the medium to short term looks unlikely. The governor said in his presser that if the depressed sale of vegetable prices is excluded, inflation would have been 140 bps higher than the CSO reading,” he said.
In the policy statement, RBI said it remained committed to bringing headline inflation closer to 4 per cent on a durable basis and in a calibrated manner.
Commenting on the transmission of rates, Bodke said there is still room for further transmission because RBI lowered key policy rates by 130 bps and banks on an average have lowered rates by only 90 bps.
The demonetisation-induced ease in bank funding conditions has led to a sharp improvement in the transmission of past policy rate reductions into marginal cost-based lending rates (MCLRs).
A reduction in MCLR led to fall in lending rates for healthy borrowers, which should spur a pick-up in both consumption and investment demand.
A rate cut of 25 bps by RBI was widely expected and it would have lifted market sentiments, but a further rally would now depend on how global markets behave. With no more rate cut in sight or no positive trigger, further rally in stocks looks difficult.
“After a long stint of shrinking economy and then cash ban, people have been postponing purchases at this juncture. A rate cut was necessary to bring that demand back in the system," Motilal Oswal, Chairman & MD, MOFSL said.
“Markets would react nervously to this stance and the Nifty50 will correct marginally to settle around 8,500-8,600 levels. From a long-term perspective, corporate earnings are showing some green shoots against weak expectation because of the cash ban,” he said.
He said investors should use any correction as an opportunity to deploy more money in equity from a long-term perspective.
The story does not end there. The big story is the change in stance by the central bank from accommodative to neutral – which in simple words means we mean the rate cut cycle may be over for now.
Analysts say, more than anything else, this change of policy stance might hurt market sentiment.
RBI said the Monetary Policy Committee (MPC) of RBI decided to change the stance from accommodative to neutral to assess how the transitory effects of demonetisation on inflation and the output gap play out.
“The market has clearly been taken in by a rude shock as RBI has changed its stance from accommodative to neutral. This was something the market had not factored in,” Ajay Bodke, CEO & Chief Portfolio Manager - PMS at Prabhudas Lilladher Private, told ETMarkets.com.
“The scope of further rate cut in the medium to short term looks unlikely. The governor said in his presser that if the depressed sale of vegetable prices is excluded, inflation would have been 140 bps higher than the CSO reading,” he said.
In the policy statement, RBI said it remained committed to bringing headline inflation closer to 4 per cent on a durable basis and in a calibrated manner.
Commenting on the transmission of rates, Bodke said there is still room for further transmission because RBI lowered key policy rates by 130 bps and banks on an average have lowered rates by only 90 bps.
The demonetisation-induced ease in bank funding conditions has led to a sharp improvement in the transmission of past policy rate reductions into marginal cost-based lending rates (MCLRs).
A reduction in MCLR led to fall in lending rates for healthy borrowers, which should spur a pick-up in both consumption and investment demand.
A rate cut of 25 bps by RBI was widely expected and it would have lifted market sentiments, but a further rally would now depend on how global markets behave. With no more rate cut in sight or no positive trigger, further rally in stocks looks difficult.
“After a long stint of shrinking economy and then cash ban, people have been postponing purchases at this juncture. A rate cut was necessary to bring that demand back in the system," Motilal Oswal, Chairman & MD, MOFSL said.
“Markets would react nervously to this stance and the Nifty50 will correct marginally to settle around 8,500-8,600 levels. From a long-term perspective, corporate earnings are showing some green shoots against weak expectation because of the cash ban,” he said.
He said investors should use any correction as an opportunity to deploy more money in equity from a long-term perspective.
