RBI neutral stance raises eyebrows

RBI neutral stance raises eyebrows

FPJ BureauUpdated: Wednesday, May 29, 2019, 08:46 AM IST
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6-member MPC unanimously vote for 25 bps hike; CPI forecast revised to 4.9%

Mumbai : The 25 basis point hike in policy rates by the Reserve Bank of India on Wednesday came as a surprise for analysts, who cautioned to brace for more such moves in the future as the central bank has upped its inflation forecast.

With all its members voting for the increasing, the 6-member Monetary Policy Committee (MPC) surprised markets by raising the repo rate, at which it lends to other banks, to 6.25 per cent but kept its policy stance as “neutral”.

The committee “felt that there was enough uncertainty for us to keep to the neutral stance and yet respond to the risks to (the) inflation target that have emerged in recent months,” RBI Governor Urjit Patel said.

The reverse repo rate, at which it borrows from banks, was also raised by similar proportion to 6 per cent.

This is the first increase in interest rate since January 28, 2014 when rates were hiked by a similar proportion to 8 per cent.

Icra Ratings’ managing director and chief executive Naresh Takkar said the rate hike will push up bank lending rates, impacting their margins, and may also test the strength of the investment recovery in FY19.

“Based on the past narrative of RBI, we did not anticipate…with this hike, RBI has already signalled a reversal on policy rates, and we believe one more may be in store during FY19,” the rating agency said.

It attributed the hike to both domestic considerations which are causing an increase in inflation, as well as international ones like the US Fed’s stance with respect to unwinding of its balance sheet and guidance on interest rates.

“With growth strengthening and core inflation picking up, we think Wednesday’s hike marks the start of a modest tightening cycle,” said Shilan Shah, the senior India economist at Capital Economics.

Domestic factors which will hurt inflation will include house rent allowance revision by state governments, surge in minimum support prices and also impact of the crude price hikes, it said.

The agency’s rival Care Ratings said that it had anticipated for a status quo in rates at the policy announcement and added that it expects “at least” another 0.25 per cent hike in rates by December and possibly one more by March next year.

The rise in inflationary expectations, risks posed by higher crude oil prices and a weaker rupee resulted in the “pre-emptive” rate hike by the RBI’s monetary policy committee (MPC), the six-member rate-setting panel, Takkar said.

“The maintenance of the neutral stance suggests that future rate hikes would be data dependant,” he added.

Crisil Ratings’ chief economist Dharmakirti Joshi echoed the same, saying the neutral stance implies RBI wants to “keep its options open” in the wake of domestic and global uncertainties.

Governor Urjit Patel later explained that the growth momentum is also picking up in the economy and the MPC decided to focus on its core objective of inflation targeting.

He said the RBI will be cautious way forward and will look at data on both inflation and growth.

RBI’s move to allow a further carve-out from SLR for liquidity coverage ratio under Basel-III norms will provide more liquidity to banks and moderate short-end interest rates Rajnish Kumar, Chairman, SBI.

The RBI decision to allow banks to spread MTM losses on investments for the June quarter, equally over a period of four

quarters and increase in LCR carve-out from SLR, will give some relief to the banks   Melwyn Rego, MD&CEO, Syndicate Bank .

This will entail a careful balancing of global headwinds from elevated crude prices, geopolitical tensions, and domestic policies of MSPs, state pay commissions on growth-inflation dynamics Rana Kapoor, MD & CEO, Yes Bank..

A 25 bps rate hike on back of 30 bps

increase in its inflationary forecasts for H2 2018-19, confirms the expectations of durable price pressure in the economy in coming months.

Rajni Thakur, Economist, RBL Bankaaaa

MSME sector to get breather

NEW DELHI: RBI eased NPA classification norms for such units facing input credit linkages and associated issues. “NPA recognition for GST and non GST MSMEs now at 180 days for dues up to December 31, 2018. Tapering norm from January 1, 2019 to encourage GST registration” Financial Services Secretary Rajiv Kumar said. “Having regard to the input credit linkages and associated issues, it has now been decided to temporarily allow banks and NBFCs to classify their exposure, as per the 180 day past due criterion, to all MSMEs with aggregate credit facilities up to the above limit, including those not registered under GST,” RBI said.

Affordable housing  gets a shot in arm

NEW DELHI: The affordable housing segment will get a boost with RBI raising the loan limits under priority sector lending (PSL), and the government deciding to use surplus land of sick PSUs for construction of such dwelling units. In another development, the President has promulgated an ordinance recognising home-buyers as financial creditors, thus giving them greater say in insolvency of defaulting builders. RBI said that it has been decided to revise the housing loan limits for PSL eligibility from Rs 28 lakh to Rs 35 lakh in metropolitan centres and from Rs 20 lakh to Rs 25 lakh in other centres.

 The overall cost of the dwelling unit in the metropolitan centre (with population of ten lakh and above) and at other centres does not exceed Rs 45 lakh and Rs 30 lakh, respectively.

No major impact on home sales: Experts

MUMBAI: RBI’s rate hike will not have a major impact on home sales, which has seen a revival in the past few months, say experts. Naredco national president Niranjan Hiranandani said the hike is justified on account of inflationary trends, global hardening of interest rates as also petroleum prices moving upwards. “It will not make a major difference to real estate. However, in the long run, we would prefer rates coming down,” he said. JLL India CEO and country head Ramesh Nair said the hike may seem to dampen sentiments in the market, but in terms of real estate, may have little or no impact. “As almost all home loans these days are on floating rates, the rise and fall in home loan rates does not impact the performance of residential real estate sector much and tends to balance each other out over long term,” he reasoned.

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