Tag: RBI Monetary Policy

Long duration debt funds become attractive with RBI’s rate pause

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India’s (RBI’s) rate-setting panel has unanimously approved to keep the benchmark lending rates unchanged for the second consecutive time. Even though, RBI Governor has said that this is just a pause and not a pivot yet, Debt mutual funds managers are asking individuals to invest in longer duration bond funds. Long duration funds offer higher returns in a rate cut cycle.

The MPC since May 2022 hiked rates by 250 bps and has paused since April. RBI Governor Shaktikanta Das, on Thursday, announced that the Monetary Policy Committee (MPC) unanimously decided to keep the rate unchanged at 6.5 percent.

Mutual fund managers see this as an opportunity for debt investors to take exposure to longer duration bond funds and gilt funds. “We reiterate our views that investors should go as long as possible depending on risk appetite. Existing carry despite recent fall in yield continue to remain attractive and should not be missed out. Medium to Long Duration funds may be a preferred investment option for investors,” says Marzban Irani, CIO – Debt , LIC Mutual Fund.

Here are 3 and 5 years returns of some of the medium to long duration funds:

(Source: Moneycontrol)

Fund managers say that the decision of the MPC was in line with broader market expectations. The MPC kept the key policy rates unchanged as also retained the current stance of gradual withdrawal of accommodation. Mahendra Jajoo, head of fixed income, Mirae Asset Mutual Fund, says that even as domestic macro environment continues to improve with latest growth data surprising on the upside and inflation data surprising on the down side, global uncertainties remain in terms of entrenched services inflation, higher alert flag on El Niño and adverse geo political developments.

“The uncertainity globally necessitates continued caution, dampening hope of any rate cut in immediate term but still suggesting an extended pause. As the markets were beginning to price a more optimistic time frame on future rate cuts, some realignment may be warranted. Bond yields are likely to remain range bound. 10Y GOI yield may trade in 7-710 percent band. Money market rates may inch up by 10-15bps. Overall, the outlook remains constructive on fixed income,” says Jajoo.

Prashant Pimple Chief Investment Officer – Fixed Income, Baroda BNP Paribas Asset Management India, also says that the Monetary policy outcome was in line with his expectations in terms of status quo on policy rates and lowering of FY 24 CPI projections to 5.10 from 5.20 percent ; however, MPC preferred to be in a wait and watch mode with as Governor mentioned “ arjuna’s eye “ towards inflation.

“With 1 year forward real rates in a positive territory and somewhat a goldilocks economy for the domestic markets ; We expect a long pause by RBI for this calendar year. We expect the yield to bear steepen from here,” says Pimple.

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Worst over for home loan borrowers, but when will interest rates start going down

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Home loan interest rates may start dropping before the end of 2023, experts said on Thursday after the Reserve Bank of India (RBI) maintained a status quo on the repo rate as well as its policy stance. Although inflation still remains higher than the tolerance level, it has decreased over the past few months, allowing the RBI to maintain its stance. Experts believe this status quo will facilitate positive decision-making for homebuyers and lenders.

Interest rates stabilising

Currently, the repo rate stands at 6.5 percent. This is the second incidence when the RBI paused the rate. This is good news for home loan borrowers as it signals that interest rates are stabilising. However, the best is yet to come when RBI starts cutting the rate.

Before hitting the pause button for the second time, the central bank has raised the repo rate cumulatively by 250 basis points since the beginning of the rate hike cycle in May 2022. For most banks, the external benchmark to which their home loans are linked is the repo rate. So, with the hike in repo rate, all existing home loans on floating rates of interest became expensive.

Ramani Sastri, Chairman and MD at Sterling Developers said the decision to keep the repo rate unchanged was a positive development as it provides home buyers and investors with some stability and reduces uncertainty and volatility associated with interest rate fluctuations.

“Another repo rate hike by the RBI would not augur well for the real estate sector as home loan interest rates are already at a higher level. Now, we expect a continuation of existing policy rates through 2023. Undoubtedly, a further reduction in interest rates in the near future would be preferred to bolster overall market confidence and make it more enticing for home buyers and support the growth momentum in the real estate sector,” Sastri said.

Here’s a look at the current home loan rates of key banks:

(Source: Bankbazaar)

The road ahead

While experts are hinting at rate reductions in the near future, those expecting it in October should be disappointed.

In an interview with CNBC-TV18, Kaushik Das, Chief Economist at Deutsche Bank said, “The consensus is for a 6 percent growth this year, RBI is for 6.5. But if RBI’s forecasts are met, then the logic for rate cuts get pushed back and probably in April of next year is when you could expect RBI to start cutting rates and we have a prolonged extended pause for now.”

Additionally, considering the prevailing circumstances, inflation still needs to be closely monitored to bring it down to 4 percent level, potentially prompting the RBI to reconsider its stance on interest rates and achieve a balance between growth and inflation.

As Das said, “We need to maintain Arjuna’s eye on evolving inflation scenario”.

It must be noted that currently there is no indication from the RBI that the rate cycle will change anytime soon.

“The path thereon will be dependent on the evolving domestic inflation and growth dynamics and the US Fed stance,” said Amit Jain, CMD at Arkade Group.

Additionally, the progress of monsoon would be keenly watched and would be one of the significant factors in deciding the direction of inflation.

What should borrowers do?

While borrowers are still reeling under the pressure of lengthening loan tenures and rising interest rates, Adhil Shetty, CEO at Bankbazaar.com, said that those on a repo-linked loan should automatically see a reset after any repo rate change within a quarter.

“The lowest rates being offered in the home loan market today are in the 8.40 percent to 8.50 percent range for eligible borrowers. Those who are paying a significantly higher rate should consider a refinance. If depositors are able to shave off 50 basis points or more off the rate, it could lead to significant savings over the long term,” Shetty said.

He added that when individuals think about their home loans, they should also think about the premium they pay over the repo. For example, at 8.50 percent, the premium over the repo is 2 percent. Prime borrowers with good credit histories and strong income credentials can borrow at the lowest premium while others will have to pay higher.

Naveen Kukreja, Co-Founder and CEO at Paisabazaar said that existing floating rate borrowers having adequate surpluses should opt for prepayment to reduce their overall interest cost. They should preferably opt for the tenure reduction option to generate higher savings in interest cost.

“Existing borrowers who have witnessed significant improvements in their credit profile can exercise balance transfer to reduce their interest cost. Their improved credit profile may make them eligible to transfer their existing loans to other lenders at much lower interest rates,” he said.

Home buying demand

Vimal Nadar, Head of Research at Colliers India, believes RBI’s decision is a significant breather for lenders, developers and homebuyers. “First-time homebuyers will be better placed to make their home buying decision in a stable lending rate regime. Fence sitters in the affordable and mid-segment will have greater visibility of their EMIs and thus affect buying,” he said.

Amit Goyal, Managing Director of India Sotheby’s International Realty, thinks the pause in rate hikes would instil a sense of optimism among borrowers and the momentum in home sales will continue.

Echoing similar views, Pradeep Aggarwal, Founder & Chairman, Signature Global (India) Ltd, said home loan borrowers have embraced the previous interest rate hikes, and as long as the home loan interest rates hover around 9 percent per annum, it is unlikely to have a significant impact on housing demand.

Piyush Bothra, Co-founder and CFO, of Square Yards, is firm that homebuyers know that their EMIs down the line will only decrease further. “A lot of fence sitters are expected to jump in, and the developers are likely to cash in on this pent-up demand. We firmly believe that we are at the beginning of a multi-year real estate bull market buoyed by high disposable incomes, high affordability and moderate-to-low interest rates,” he said.

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Interest rates in India have peaked, say experts

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) has announced its decision to keep the repo rate, the lending rate, unchanged at 6.5 percent. This aligns with the expectations of market watchers and economists, reflecting the consensus view. The RBI’s Monetary Policy Committee (MPC) made this decision, which was widely anticipated and mirrored the predictions of a CNBC-TV18 poll.

Alongside the repo rate, the standing deposit facility (SDF) rate will also remain steady at 6.25 percent, and there will be no changes to the marginal standing facility (MSF) and bank rates.

The unanimous decision by the MPC to maintain the current interest rates demonstrates the committee’s commitment to managing inflation within the desired target while prioritising economic growth. However, there was a 5:1 majority vote in favor of withdrawing accommodation, indicating a cautious approach towards potential future policy adjustments.

Following the governor’s statement, key economists and industry experts shared their insights on the decision. Kaushik Das, Chief Economist at Deutsche Bank, expressed that the RBI’s decision was in line with expectations. He noted that even if inflation could be mathematically reduced to 5 percent, the central bank would likely be cautious and make only a small adjustment, which is exactly what has happened.

“It’s along expected lines, whatever we expected, happened,” he said.

Abheek Barua, Chief Economist at HDFC Bank, described the RBI’s announcement as an objective assessment with a hint of dovishness. He mentioned that those who were expecting a change in stance, which was not the majority, might have found it slightly disappointing.

Ashwini Kumar Tewari, MD-Risk Compliance and SARG at SBI, emphasized that the RBI’s indication that the peak cycle has been reached means that banks are unlikely to increase loan rates. He stated that banks will stay the course, and any natural increases will be linked to the Marginal Cost of Funds Based Lending Rate (MCLR).

“In terms of general pickup of loan rates, I don’t think there’ll be any increases by the banks, because the Reserve Bank is clearly indicating that the status quo or peak cycle has been reached,” he said.

Amandeep Chopra, Group President and Head-Fixed Income at UTI MF, commented on the expected rate front, stating that there were no surprises in the policy announcements. However, he noted a slight tilt of hawkishness in some of the additional comments made by the Governor.

Chopra highlighted the uncertainty surrounding the future inflation trajectory, despite the comfort drawn from the 5 percent inflation forecast. He pointed out the risks emphasized by the Governor and the references to global experiences in countries like Canada, Australia, and New Zealand, which indicate an uncertain future path for monetary policy.

Ajay Srivastava, CEO of Dimensions Corporate Finance Services believes that it will be a pro-growth period moving forward. He emphasized that the Reserve Bank of India (RBI) has injected liquidity into the system, placing inflation concerns on the back burner.

For more details, watch the accompanying video

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If you are hoping for RBI to cut interest rate in October, you’d be disappointed, say these economists

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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While the Reserve Bank of India (RBI) has kept interest rates unchanged, the signs aren’t encouraging for those waiting for a fall in repo rate, which is the interest paid by banks for funds borrowed from the central bank.

Many experts are of the view that the increased emphasis on curbing inflation to the RBI target of 4 percent may mean that the rate cuts, if any, will come later than what most people had anticipated until now.

In an interview with CNBC-TV18, Kaushik Das, Chief Economist at Deutsche Bank said that those who were expecting rate cuts to begin in October will be disappointed. “The consensus is for a 6 percent growth this year, RBI is for 6.5. But if RBI’s forecasts are met, then the logic for rate cuts get pushed back and probably in April of next year is when you could expect RBI to start cutting rates and we have a prolonged extended pause for now,” he added.

Das is not alone. Even Amandeep Chopra, Group President & Head-Fixed Income, UTI MF and Ashwini Kumar Tewari, MD-Risk Compliance & Sarg, at the State Bank of India, were of the view that February 2024 is the earliest that one can expect a cut in benchmark lending rates by RBI.

Repo rates are the rates to which bank loans, for everything from home loans to auto loans and corporate loans, are benchmarked. So, for banks to cut their interest rates, RBI will have to take the lead.

The cautious commentary was triggered by Governor Das, who said that it is important to maintain an ‘Arjuna’s eye’ on inflation, in his address post the latest monetary policy review.  The reference is to a tale from the Mahabharata, part of the Indian mythology, where the protagonist Arjuna’s ability to hit his target has become a standard for determination, concentration and skilled marksmanship.

Das repeatedly citing the target of 4 percent for retail inflation, and not highlighting the 2 percent wiggle room (i.e. up to 6%) that the inflation targeting framework allows him,  is being a seen as a sign of RBI turning more hawkish than what the market had budgeted for.

Following the commentary from the RBI Governor, the morning enthusiasm in the Indian equity markets made way for an afternoon sell-off. Both Nifty 50 and Sensex slipped sharply from the day’s high. Nifty Bank, the index of the country’s biggest banking stocks, which looked set to cross its all-time high was down more than 200 points from the day’s high. Real estate stocks, which are sensitive to lending rates, saw a sharp dent.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Rs 3 lakh crore additional liquidity may return to system if all Rs 2,000 notes are deposited/exchanged: RBI Guv

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Reserve Bank of India (RBI) Governor Shaktikanta Das on Thursday said that Rs 1.8 lakh crore additional liquidity had entered the system via deposits of Rs 2,000 notes. “If the 85 percent trend holds and all Rs 2,000 notes are returned by September, we will have Rs 3 lakh crore additional liquidity,” Das said while addressing a press conference after announcing the bi-monthly monetary policy.

“This is in line with our expectations. While 50 percent of Rs 2,000 notes in circulation as of March 31 have come back to the system, approximately 85 percent of the notes have come back as deposits to banks. The average system liquidity is still in surplus mode and could increase as more Rs 2,000 banknotes get deposited in banks,” Das said.

The governor also urged the public not to panic for exchange or deposit of Rs 2,000 notes but should avoid last-minute rush.

He made it clear that RBI was not thinking of withdrawing Rs 500 notes, or even re-introducing notes in the Rs 1,000 denomination, and requested the public not to speculate on this.

On May 19, the RBI announced the withdrawal of Rs 2,000 denomination banknotes as part of its currency management and permitted the exchange of such notes (up to Rs 20,000 in one go) from May 23 onwards. The central bank has given the public time till September 30 to either deposit such notes in accounts or exchange them at banks.

Customers can visit the nearest branch of a bank and provide account details. As per RBI’s guidelines, even customers without bank accounts can exchange/deposit Rs 2,000 banknotes with other denominations. Banks will then provide the request slip, which must be filled by the customer. This will require basic details such as the ‘Tenderer’ name and information on the denomination such as the number of pieces and value. The customers will also have to mention the place and date of exchange.

The RBI introduced the Rs 2,000 notes in November 2016 to meet the currency requirement of the economy in an expeditious manner after the withdrawal of the legal tender status of all Rs 500 and Rs 1,000 banknotes in circulation at that time.

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RBI proposes issuance of e-rupee vouchers on behalf of individuals

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) on Thursday proposed to enable the issuance of e-rupee vouchers on behalf of individuals and to simplify the process of issuance, redemption and a few aspects of the current framework. This measure, RBI Governor Shaktikanta Das said while announcing the bi-monthly monetary policy, would make the benefits of e-rupee digital vouchers accessible to a wider set of users.

“At present, purpose-specific e-rupee digital vouchers are issued by banks. It is now proposed to expand it by permitting non-bank prepaid payment instruments (PPI) issuers to issue e-rupee vouchers and enabling the issuance of e-rupee vouchers on behalf of individuals,” he said.

E-rupee voucher, a digital voucher which was launched in August 2021, is a wholly cashless and no-contact electronic payment instrument that is delivered to beneficiaries’ mobile devices (even mobile devices that are non-android or iOS) as either a QR code or an SMS-based e-voucher.

Currently, purpose-specific vouchers are issued by some banks on behalf of central and state governments and to a limited extent on behalf of corporations. These are issued in partnership with the National Payments Corporation of India (NPCI) for specific reasons such as payment of hospital bills, etc.

The central bank also said it had decided to permit banks to issue Rupay prepaid foreign exchange (forex) cards for Indians travelling abroad. This will expand the payment options for Indians going abroad. The RBI governor said Rupay cards would also be enabled for issuance in foreign jurisdictions.

Meanwhile, the central bank opted for a pause for the second time in a row, maintaining the key benchmark policy rate at 6.5 percent as inflation moderates. The rate increase cycle was paused in April after six consecutive rate hikes aggregating to 250 basis points since May 2022. While keeping the interest rate intact, Das said headline inflation still remains above RBI’s target of 4 percent and is expected to remain so during the rest of the year.

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RBI MPC Meeting Highlights | Nearly 85% of Rs 2,000 notes have come back as deposits to banks, says Shaktikanta Das

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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RBI Monetary Policy Meet 2023 Highlights: Reserve Bank of India (RBI) Governor Shaktikanta Das announced on June 8 that after three days of deliberation, its Monetary Policy Committee meeting has decided to keep the key policy repo rate unchanged at 6.5 percent. This is in line with the CNBC-TV18 poll of economists’ forecast which had projected status quo as inflation remains within the comfort zone of the central bank. Track RBI Monetary Policy LIVE updates here

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Goldman Sachs economist predicts positive US economic outlook and RBI rate pause

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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As the latest US jobs data has surpassed consensus expectations, it indicates a robust labour market and suggests a potential acceleration in economic growth, according to Santanu Sengupta, India Economist at Goldman Sachs. Talking about India growth and inflation, Sengupta also predicts a likely pause by RBI from further rate cuts or hikes in the near term.

However, since the US jobs data has upped chances of one more rate hike from the Fed in July, though the June futures pricing is unchanged. Here we analyse three reasons for why is it important to India:

1. Tighter global financial conditions in the US means tighter conditions for all economies.

2. A huge part of the upside surprise in India’s Q4 GDP came from net exports and hence a global slowdown can dull growth.

3. Another rate hike from the Fed means, the RBI cut also gets pushed out.

In an interview with CNBC-TV18, Santanu Sengupta, India Economist at Goldman Sachs spoke at length about the India growth and inflation story. He is the man who upped India’s GDP forecast twice in the last 10 days.

Also Read | US job growth beats expectations in May; unemployment rate rises to 3.7%

According to him, the latest US jobs data has surpassed consensus expectations. This positive development indicates a robust labour market and suggests a potential acceleration in economic growth. As employment plays a crucial role in shaping consumer spending, a stronger job market bodes well for the overall health of the US economy.

He said, “We continue to expect a pause at the June FOMC meeting, reflecting the mixed household survey, the softness in the hours worked and a decline in the average hourly earnings growth, but overall, from a labour market point of view, data is actually looking better than what expectations were.”

While shifting focus to the Indian monetary policy, Sengupta expects the RBI to maintain a pause in interest rate changes. This stance suggests that the central bank will likely refrain from further rate cuts or hikes in the near term. The decision to pause rates often stems from a desire to assess the impact of previous policy actions before introducing new changes.

Sengupta anticipates that the RBI will continue to retain its current monetary policy stance. This implies that the central bank will adhere to its existing framework and objectives. The RBI’s stance reflects its commitment to maintaining price stability, fostering sustainable economic growth, and ensuring financial stability in the Indian economy.

Also Read | Why RBI may choose to keep interest rates unchanged for now

In line with his analysis, Sengupta predicts that the RBI will likely maintain the repo rate within the range of 5.75-6 percent. The repo rate is the rate at which the RBI lends money to commercial banks, influencing borrowing costs and liquidity in the economy. By keeping the repo rate steady, the RBI aims to provide stability and support economic recovery.

Also Read | RBI likely to go for rate hike pause in next MPC, say economists

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Motilal Oswal AMC predicts RBI’s likely pause on rate hike on June 8

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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As the financial markets eagerly await the Reserve Bank of India’s monetary policy decision on June 8, Manish Sonthalia, Head Equities-PMS at Motilal Oswal Asset Management points out that the consensus among analysts and experts is gradually building towards a pause.

The RBI is likely to go for a pause in interest rate hike decision on June 8, according to a CNBC-TV18 poll of economists. The Monetary Policy Committee of the RBI is likely retaining its stance on withdrawal of accommodation, most of the economists said, even as there lay a possibility for a change to neutral.

“The consensus seems to be building towards a pause. They have already hiked enough. Of course, now there has been oil cut by the Saudis and that is going to stroke some inflationary pressures. But now, it’s basically a pause and from that point of view, I would believe that it’s positive equities,” Sonthalia told CNBC-TV18.

Also Read | Why RBI may choose to keep interest rates unchanged for now

While inflationary pressures have been on the rise in recent months, Sonthalia argued that the current situation calls for a cautious approach. He highlighted that the global central banks including the US Federal Reserve, have adopted a patient stance by maintaining accommodative policies. Sonthalia suggested that the RBI may also take a similar path to support the economic revival and ensure stability in uncertain times.

CNBC-TV18’s citizens MPC caught up with global experts to deliberate on the issues that are before the RBI and what should be done with rates and with monetary policy.

Also Read | RBI likely to go for rate hike pause in next MPC, say economists

Samiran Chakraborty, Chief Economist for India, Citi, said on CNBC-TV18 on June 2 that India’s central bank is likely to be happy with the growth figures and he won’t be surprised if there is an upward revision in growth.

Nomura Chief Economist, India, Sonal Varma pointed out the need to redraw the inflation trajectory as she expects average inflation for the April to June 2023 quarter of FY24 to be below RBI’s projection. She, however, believes the biggest uncertainty is El Nino and what it means for food outlook.

For more details, watch the accompanying video

Also, catch all the live updates on markets with CNBC-TV18.com’s blog

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow