'RBI will link further cuts to inflation, fiscal stance'

The Reserve Bank of India (RBI) India's central bank kept its key repo lending rate unchanged at 6.75 per cent on Tuesday, as widely expected, after consumer inflation picked up to a four-month high and as emerging markets brace for a US rate hike.

All 45 respondents surveyed by Reuters last week expected the RBI would keep the repo rate unchanged.

Commentary 

A. Prasanna, Economist, ICICI Securities Primary Dealership Ltd  

"The policy statement was along expected lines. We still think RBI will be on hold in the next policy also and await fiscal stance and inflation outturn to decide on further accommodation. In any case we think that inflation has bottomed out at 5 per cent and thus space for further easing is limited to 25 bps."

Kunal Shah, fund manager, debt, Kotak Life Insurance  

"The RBI is keeping a lot of hope that the government will manage the fiscal deficit even after implementing the pay commission's recommendations. I think it is a well balanced policy on upside and downside inflation risks going ahead. It is less hawkish than what the market was expecting."  

Mahendra Jajoo, fixed income fund manager at MJ Investment Services  

"The governor is still maintaining an accommodative stance, he is saying as and when room opens up there can be more rate cuts, so that's a positive for the markets. He did say that the fed action can create volatile knee-jerk reaction, but beyond that there will be no impact.

"At the margin, food prices and pay commission may have some impact but the government has found enough compensatory areas to save and lower the fiscal deficit. I am fairly confident that the combination of the current government and Rajan will ensure that markets remain in good shape. I think there's room for another rate cut after the budget next year."

Abheek Barua, chief economist, HDFC Bank, New Delhi

"This policy is a bit of a non-event, in line with majority expectations. But going forward the risk is compound, and the risks point to a very cautious approach to accommodation. "

"This is a cautious policy. The rate cuts have been front-loaded. Unless there is commitment of fiscal consolidation in the budget and a clear sort of path visible for the pay commission and its effect, I don't think the RBI is likely to move. I think we will have to wait until after the budget for any move, if at all."

R Sivakumar, head of fixed income, Axis Asset Management, Mumbai

"There has been a mix of data that has come in the last couple of months which includes some hardening of food prices, which RBI is concerned about, and the pay commission - the full effect of which will only be seen over a period of time. These of course are causes of concerns, although not causes of worry yet - it's too early to take that call.

"The path of fiscal consolidation will be very, very important in determining how many rate cuts you get next year. Assuming the government sticks to its earlier fiscal consolidation plan, we have a sense that in the next year you will get more rate cuts.

"Obviously Fed this month is expected to hike, therefore it makes sense for RBI to pause. But over a period of time it's very conformable for RBI to have a very divergent policy. "

"We have seen in the past that Fed has been ultra accommodative while the Reserve Bank has been hiking in 2013-14. So there have been periods of time when there is substantial divergence in the Fed and RBI policy so we do not expect RBI to follow the Fed in any way. Of course if the there's some volatility as a result of the Fed actions, we expect to ride that out."

Background  

* India's central bank is likely to keep its policy rate unchanged, following a big cut two months ago, and to sound cautious about the scope for more easing as it aims to meet its 2017 inflation target and braces for a U.S. rate hike.

* India will allow offshore insurance companies, pension funds and sovereign wealth funds to lend to local companies for the long term, the central bank said, easing rules for offshore borrowing.

* India's economic growth picked up in July-September, outpacing China on improving domestic demand and manufacturing activity, and the acceleration could persuade the country's central bank to keep interest rates unchanged.

* India's fiscal deficit reached Rs 4.11 trillion ($61.67 billion) during April-October or 74 per cent of the full-year target, government data showed.

* India's central bank is allowing foreign investors to buy corporate bonds that are either totally or partly in default, it said, a potential boost to the country's nascent distressed debt market.

* India's merchandise exports shrank 17.53 per cent in October from a year ago to $21.35 billion, government data showed, on weak global demand.

* India's wholesale prices dropped for a 12th straight month in October, falling an annual 3.81 per cent mainly due to easing fuel prices, government data showed.

* Rising prices for some food products and firm demand during the festival season pushed up India's retail inflation to a four-month high in October, making it less likely the central bank will cut interest rates at its policy review.

* India's annual industrial output grew at a slower-than-expected pace of 3.6 per cent in September, dampened by a slower expansion in the mining sector, government data showed. x

* India has eased foreign direct investment norms in 15 major sectors, including mining, defence, civil aviation and broadcasting, the government said, in a bid to drum up investment and speed growth.

* India's services industry expanded at its fastest pace in eight months in October as new business rose with discounting probably stoking demand, a survey showed.