The new cheque clearing norms will ensure ‘on realisation settlement; Seems like we must remain patient regarding any potential changes in stance or rate cuts
Dinesh Khara, Chairman, SBI:
FinTech BizNews Service
Mumbai, August 10, 2024: Monetary Policy Committee (MPC) of the RBI today decided by a 4 to 2 majority to keep the policy repo rate unchanged at 6.50 per cent. Here are the views of the leading bankers:
Dinesh Khara, Chairman, SBI: “The policy announcement reaffirms that domestic growth continues to be robust even as global growth continues to face several headwinds. Food inflation needs to be monitored carefully even as monsoon rains could provide a relief.
The decision to have a public repository of digital lending apps would ensure an orderly development of digital lending market. The decision to increase the frequency of reporting of credit information would enable borrower risk assessment on a real time basis. The changes to UPI transactions limit and delegated payments would further deepen the use of digital payments. The new cheque clearing norms will ensure ‘on realisation settlement.”
Shanti Ekambaram, Deputy MD, Kotak Mahindra Bank: "The MPC's decision to maintain status quo on policy rates and stance underscores their commitment to managing inflation and ensuring price stability. With food inflation contributing 46% of the total inflation basket, it's critical to address this to prevent spillover risks to core inflation. Growth remains resilient, with steady urban consumption, emerging rural demand, stable manufacturing, and buoyant services growth projected over the next three quarters. The expectation of a normal monsoon further supports stability in agriculture.
In light of global financial market volatility, divergent stances by central banks worldwide, resilient domestic growth, and higher food inflation, the MPC's decision to keep rates unchanged is prudent. The MPC’s focus on maintaining price stability and targeting sustainable inflation of 4% is clear. Seems like we must remain patient regarding any potential changes in stance or rate cuts."
Vishal Goenka, Co-Founder of IndiaBonds.com: “Global markets turbulence started with Bank of Japan hiking rates last week and strengthening of JPY. The reverberations were felt across all asset classes globally with US government bonds and rates rallying hard as risk off and safe haven bets took control.
India however remains fairly insulated as of now with last week moves. It is pretty certain that US Fed will likely cut rates in its September meeting by expected 0.25%.
However, it may not necessarily transform into immediate cuts by RBI as insulation means we have domestic factors such as inflation and growth that play an important factor. The ‘wealth effect’ created by high equity valuations actually fuel inflationary pressures. The credit-deposit ratio imbalance in banking system would further edge up market rates for capital and deposits.
Nonetheless, the interest rate trajectory points downwards - a matter of when rather than if - and anticipate rate cuts before the end of 2024. Outlook for Indian bonds remain very constructive and potential to benefit from the cyclical down move in next couple years. Best way to express this would likely be a barbell strategy where potential for capital gains is picked up from long-term government and bank infrastructure bonds. The benefit from current high level of interest rates can be derived from short term high yield bonds after investors’ due diligence on corporates.”
Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank: “The RBI expectedly kept rates and stance unchanged with unambiguous focus being retained on inflation. With growth remaining robust the MPC still has room to hold on to policy stance to get confirmation on the disinflationary trend. We continue to expect scope for change in stance in the October policy with rate cuts beginning from December. The prospects of simultaneous change in stance and rate cuts could increase depending on how domestic inflation and global environment transitions.”
Radhika Piplani, Chief Economist, DAM Capital Advisors: Unambiguously focused on inflation: " What’s changed? Simplistically, nothing has changed from the last policy, except for changes to the quarterly forecasts for inflation and growth. Key policy rate remains unchanged (Repo:6.5%) and so does the accommodative stance (4:2 vote for both rate and stance). Finetuning of system liquidity would continue through VRR and VRRR auctions like it has since June 2024.
· MPC’s response to change in global conditions? In the post policy Q&A discussion, the governor mentioned that the US economy continues to be strong (Q2 GDP data of 2.8% was higher than Q1 GDP data). With just one weak print of US labour market, it would be premature to call for US recession. Nonetheless, India remains resilient to external shocks with all the necessary buffers in place (FX reserves: USD675bn are at all-time high; CAD and external debt within manageable limits; international investment position improved vs last year).
· Key takeaway. As per DG Dr Patra, in the post policy Q&A discussion, India’s potential growth has started to rise. Although India’s neutral rate has risen to 1.4-1.9% as compared to 0.8-1.0% earlier, as per a new RBI study, the current real rate exactly matches the potential growth trajectory. In simple terms, a 6.5% nominal repo rate is growth supportive, given the expected inflation trajectory.
· What next? The monetary policy’s focus is to remain actively disinflationary to ensure a durable alignment of headline inflation to the target rate of 4%. Given the growth-inflation mix, we continue to expect the MPC to start with the rate cut cycle in February 2025, unless global growth worsens more than anticipated or the turbulence in global asset markets rise further."
Nikunj Saraf, Vice President, Choice Wealth: “The RBI has decided to hold its key interest rate steady at 6.50% for the ninth consecutive meeting. This decision, approved by a 4:2 majority, demonstrates the central bank's ongoing commitment to balancing the need for inflation control with supporting overall economic stability. Maintaining its 'withdrawal of accommodation' stance, the RBI is aiming to manage inflation while still nurturing growth. Food inflation remains a major concern, with the Consumer Price Index (CPI) reaching 5.1% in June, largely driven by rising vegetable prices. Given that food items account for a significant portion of the CPI basket, the RBI's focus on reining in these prices is crucial. Although the RBI has retained its FY25 real GDP growth forecast at 7.2%, slight downward revisions to the quarterly projections suggest a somewhat cautious view of the immediate economic conditions. However, positive factors like a favourable monsoon and increased kharif sowing are expected to buoy economic growth. To facilitate lending, the RBI is emphasizing flexible liquidity management, as evidenced by the rise in top-up home loans. However, any potential rate cuts are likely to be postponed until late 2024, with the priority being on controlling inflation over providing short-term economic stimulus. The central bank has also introduced new regulatory measures, including the creation of a public repository for digital lending apps and an increase in the UPI tax payment limit to boost digital transactions. With record-high forex reserves of $675 billion, the RBI is well-positioned to handle external economic shocks, but remains vigilant to global economic trends.”
Prerna Singhvi, CFA, Vice President – Economic Policy and Research, National Stock Exchange of India Limited (NSE): "The RBI’s Monetary Policy Committee (MPC), with a 4:2 majority, decided to keep the policy repo rate unchanged at 6.5% for the ninth consecutive time. The ‘withdrawal of accommodation’ stance was also retained, citing the need to remain vigilant on inflation amid a strong growth landscape. For the second consecutive meeting, two external members (Prof. J. R. Varma and Dr Ashima Goyal) have dissented by voting for a 25bps rate cut and a change in the stance to ‘neutral’. The GDP growth forecast for FY25 has been retained at 7.2%, reflective of sustained growth momentum, underpinned by a revival in rural demand amid an expected normal monsoon, buoyancy in services reflecting steady urban demand, healthy corporate balance sheets, sustained thrust on government capex and signs of pick-up in private investment activity. Similarly, the inflation forecast for FY25 was kept unchanged at 4.5%, with near-term risks emanating from base-effect tapering off, hike in telecom tariff rates and adverse climate conditions. The Governor has specifically emphasised on the importance of remaining vigilant to elevated food inflation, its persistence and the second-round effects on core inflation. The RBI’s nimble and flexible approach towards liquidity management via variable rate repo (VRR) and reverse repo (VRRR) operations has ensured liquidity conditions remain aligned with the monetary policy stance.
A data-dependent approach with a focus on navigating a plethora of domestic and external risks and its concomitant impact on headline inflation is likely to continue, preserving the gains made so far in monetary policy credibility. As India’s growth is resilient, monetary policy has greater elbow room to pursue the goal of inflation targeting and align it with the 4% target. Given the explicit emphasis on domestic risks factors to inflation, a status quo on policy rate is likely to continue for now. Going forward, it is important to note that this is the last MPC meeting of the current members with a rejig of the external members.
