In an unprecedented move, the central bank Wednesday slashed the repo rate by a 35 bps to 5.4 percent, which is a nine-year low and also lowered its GDP forecast by 10 bps to 6.9 percent with a bias to more downward risks.
Economists at largest private sector lender HDFC Bank termed reduction in growth as “paltry and somewhat dissonant with the characterization of the economic situation”.
In a note, Japanese brokerage Nomura said, the lower growth projection “is still optimistic”, while analysts at Bank of America Merrill Lynch said GDP can print in at 6.8 percent as it see a 0.20 percent risks to their 7 percent estimate now. It also expects another 40 bps rate cut through the course of the year.
Domestic rating agency Crisil said rising risks to growth, under-shooting of inflation and the dovish stance of major central banks open up possibility of more rate cuts this year, even though the repo rate is at a nine year low.
Analysts at BofA-ML, who were among the few who predicted a 0.35 percent cut, said the RBI will cut rates by a further 0.40 percent in the remainder of the fiscal to take the repo rate down to 5 percent.
The RBI will opt for a 0.15 percent cut in rates in the October review, and will go in for a conventional 0.25 percent cut in February, they said.
With the central bank front-loading rate cuts by slashing the key rates by 1.10 percent so far in 2019, a majority of analysts flagged transmission as a key focus area for the monetary authority going forward.
The Crisil note said the “problem” of transmission, however, remains, while HDFC Bank went public with its disappointment with the action on this front.
“There are few specific actions to enhance transmission of policy rates to the either the credit or bond markets except for the governor’s assurance that this will happen soon,” analysts wrote.
Meanwhile, economists at country’s largest lender SBI suggested that the central bank now start looking seriously at the external rate benchmarks.
“We strongly encourage that RBI now cajole banks towards external benchmarking,” they said, and noted SBI is the only bank which has introduced some products around that.
It can be noted that governor Shaktikanta Das had blamed low deposit growth and the banks coming out of NPA troubles as impediments for the same.
In their note, the economists at SBI said the decision to reduce the risk weights from 125 per cent to 100 percent for consumer credit will release around Rs 22,000 crore of capital for banks.