Monetary policy: RBI in wait & watch mode; door open for rate cut in future

The monetary policy committee (MPC) Wednesday kept the key repo rate unchanged at 6.00 percent and the reverse repo rate unchanged at 5.75 percent. The Statutory liquidity ratio (SLR) was cut by 50 basis points to 19.5 percent, effective fortnight starting October 14.

The central bank and the MPC also made it clear that it stood firmly on the side of inflation control in the growth-inflation trade off.

Most economist and bankers feel the policy is slightly dovish and think that RBI is probably in a wait and watch mode.

PK Gupta, Managing Director, State Bank of India said overall the policy looks dovish with focus on inflation.

Talking about the cut in SLR, Gupta said, the RBI is already in a move to transition from SLR regime to Liquidity Coverage Ratio (LCR), so they have been reducing SLR.  The additional amount of SLR which the banks are required to maintain has come down and the 11 percent SLR can be used for the purpose of LCR. This move will result in some volatility in earnings reported by the banks.

According to global practice, whatever LCR banks hold has to be mark to market, which the banks are getting used to now, he said.

The banks will have more flexibility to play on the bond portfolio, and have more flexibility to manage SLR portfolio but in immediate future it does not make much difference, said Gupta.

However, there won't be any immediate changes to the deposit and lending rates because the rates have already been cut by most of the banks, said Gupta.

Ananth Narayan, Head, Financial Markets, Standard Chartered Bank says the policy is on expected line but could be slightly negative for the bond market because there was hope building up for a surprise bonanza.

When asked if he thought there was room for more rate cut in the next policy, he said if they are moving the dial on expectation of inflation then it might put a question mark on possibility of a rate cut in December.

Meanwhile, Former PMEAC- M Govinda Rao the monetary policy is on the expected line. There is a possibility that the Reserve Bank can take risk of cutting rate if there is a serious slowdown in the economy continuing.

He further said that the 6.7 percent growth forecast is on an optimist side. The Reserve Bank is most likely to wait and see how the economy functions and based on that if necessary they may go for the rate cut in December.

Shubhada Rao, Chief Economist of Yes Bank said that the RBI has kept the door for rate cut a little bit open and they are in a wait and watch mode.

According to newly appointed Chairman of SBI Rajnish Kumar there is no case for increasing lending rates because there is ample liquidity in the market and credit growth is still muted.

When asked if the banks have to benchmark their rates to market rates, will it impact their margins, Kumar said even if they are benchmarked against market rates they will have to be done for both deposit as well as loans. Margins of the banks are not ridiculously high.

Meanwhile, Sachchidanand Shukla, Chief Economist, Mahindra Group  said in the context of a 60 basis point cut in the growth forecast the tone of the RBI is not that dovish and so there is not much room for rate cut but if real growth disappoints, then maybe they may cut rate.

From the market perspective, Ashwani Gujral of ashwanigujral.com said the policy seems to be focused only on inflation and there was no talk about growth, so there was nothing in it for the market.

Vikas Khemani, President & CEO, Edelweiss Securities said the market wasn't expecting much from the policy and so it hasn't moved. It has broadly been a non-event. However, there seems to be a window open for rate cut in case inflation comes down.

Now on the market will start focusing on quarterly earnings, said Khemani.

Talking about the market outlook, Khemani said he is not overly worried with the correction seen in the market unless something happens globally and we see a big sell off. So more consolidation may happen and once earnings start picking up, market may see further gains.