Home loan norms, interest rates: Brokerage views on RBI's policy review

LATEST MARKET NEWS - The Reserve Bank of India (RBI) kept key rates – repo and reverse repo – unchanged while reviewing the monetary Policy on Wednesday.

The central bank also sharply lowered its inflation projection for H1 FY18 (year ending March 2018) to 2.0-3.5 per cent (from 4.5 per cent earlier) and H2 FY18 to 3.5-4.5 per cent (from 5 per cent), with risks evenly balanced. It also lowered its GVA growth projection to 7.3 per cent from 7.4 per cent for FY18.

Here’s how leading brokerages and research houses interpret the RBI’s move.

NOMURA

In our view, the RBI has rightly looked through the current period of low inflation. Our longer-term models are still predicting a return of inflation to pre-demonetisation levels next year and household inflation expectations have barely budged.

We expect near-term inflation to continue to moderate. However, we expect a cyclical recovery in H2 2017, which in turn will gradually slow current disinflationary pressures on core inflation, albeit with a lag. Taking into account the recent downside surprise on food price inflation, but accounting for the house rent allowance increase, we are revising our 2017 average CPI inflation forecast to 3.6 per cent (from 4.4 per cent) and to 5 per cent in 2018 (from 5.4 per cent).

We expect the RBI to stay on hold through 2017 with an eye on the medium-term target of 4 per cent. Because of lower expected headline inflation in the next two months, we would assign a 40 per cent chance to a rate cut in August, but our base case is on hold. We are pushing out our call of a cumulative 50 basis points rate hikes to H2 2018 (vs Q2 and Q3 earlier).

BANK OF AMERICA MERRILL LYNCH

We believe that time is running out for the RBI to cut rates. If the RBI MPC cuts on August 2, it will signal a lending rate cut to banks before the busy industrial season sets in October. After all, real lending rates are running at a 20-year high at a time when the global recession is threatening to stretch beyond the Great Depression.

As 2015 showed, unduly delaying RBI rate cuts into the busy season only delay the transmission to bank lending rates into the next slack season beginning April. Should easy liquidity not drive lending rate cuts? Not really. Although banks are flush with temporary liquidity from demonetisation, M3 growth has slipped to 9.5 per cent from 10.7 per cent last year.