The Reserve Bank of India (RB) has left key interest rates unchanged. Inline with a poll, it has maintained status quo on the credit reserve ratio (5%), repo (4.75%) and reverse repo (3.25%) rates.
However, there is a change in its dovish stance seen earlier. It has increased its growth projections. FY10 GDP has now been maintained at 6% with an upward bias.
Inflation continues to be higher on RBI's radar. It is now projected at 5% from the earlier 4%.
The pall of gloom still hangs over the economy. That seemed to be the RBI Governor D Subbarao undelying mesage. In the report, he said the overall macro scenario is still uncertain. "Export demand remains weak. The services sector is sluggish on lagged impact of weak industry growth."
He hoped the government's monetary, fiscal steps would boost domestic demand. "The domestic, external financing environment has improved since H2 FY09. The business outlook has turned positive. RBI will continue to keep its eye on credit growth in the system"
How do experts rate the policy?
Sonal Varma, India Economist, Nomura Financial Advisories & Securities, feels today status quo from RBI suggests they are done with what they had to do on the policy front. "The key question going forward will be how long will it maintain this sort of accommodative or neutral policy environment. There are three key factors that RBI will be looking out for. One is on the growth outlook and how that pans out. Second is the government borrowing programme and third is the credit growth. The government and RBI have already front-loaded a large part of the borrowing programme. By the end of this calendar year, much of the borrowing programme will be through. Yesterday, RBI did mention that they are seeing nascent signs of credit growth picking up. The upward bias on the RBI’s growth projection clearly shows that once the monsoon situation is clear, there will be an increase in RBI’s GDP growth estimate also."
Nilesh Shah, Deputy MD, ICICI Prudential AMC, said the policy was in line with the expectations. Applauding the central bank's efforts, he said, "RBI has been managing the tough economic environment well. It is a policy which is trying to take away the accommodative stance and bring it to neutral gear by letting market forces play out and let the economy gain its own momentum."
Hemant Mishr, Head Global Markets South Asia, Standard Chartered Bank, feels RBI's commitment towards liquidity is comforting.
Jehangir Aziz, Chief Economist, JP Morgan, said the policy is fairly neutral. But was quick to add that one has to make sure that the neutrality is implemented in reality between this and in the next policy stance. "The economy still needs easy liquidity and monetary conditions. RBI is trying to present a balanced view about its concerns with growth as well as concerns with inflation."
Sanjiv Bajaj, MD, Bajaj Finserv & Investments, cheers RBI's move of encouraging banks to cut rates. "But I don’t think they can tell banks to lend more. That does not mean lend recklessly. If you have to see consistent growth coming, we have to see more consumer going out there because that will spur demand, that will cause corporates to start producing more raising capacity."
Where are interest rates headed?
Sunil Kalra, Director Head-Trading Fixed Income and Currencies, Citibank India, expects RBI to maintain a neutral stance going forward from its easing bias until now. He believes a large part of the previous rate hikes have already been priced in. Any rate hike by RBI, Kalra said, will be much quicker than what the market is expecting. "The market does expect some amount of rate hikes given that the one-year swap is currently around 4.2%."
Varma sees credit growth picking up around September-October, which will continue into early 2010. “This is when we should start seeing RBI move liquidity from the current accommodative excess to a more normal levels before it actually moves into rate hiking cycle next year."
According to Bajaj, there is a feeling in the market that money supply could get tighter six-nine months down the line.
The bond market reaction to the Credit Policy has been tempered. The benchmark yield remains below 7%. What is the road ahead for bond markets?
Shah feels yields may have to face the rising trend of inflation. "Open market operations by RBI will have a higher impact on yields. Hence we expect yields to be rangebound." He advises investors to invest in short-term bond funds, liquid plus, and liquid kind of fund as there will be no adverse impact of rising interest rates. "If there are people who can take a little bit of volatility on their side, then there is opportunity in income and gilt fund."
Kalra too shares Shah’s views on inflation impacting yields in the longer-term. “The inflation bet is a bit hawkish and there could be a pressure in the longer end. One could see the bond curve steepened a bit more from what it is.”
He does not expect any major reactions to today's policy as participants were factoring a status quo. He also expects sanity in the market as there is Rs 1,25,000 crore which is currently in the system. "This has been the big reason why bond market yields are where they are. This will continue to ensure that it does not fly off the handle."
How should one play banking stocks now?
According to Shah, news from the policy has already been discounted into the market. He feels the behaviour of banking stocks will depend on what happens to net interest margins, rather than yield movements.
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