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Views of Various Brokerages on New RBI Governor and Policy

September 23, 2013

The rBI Governor announced his first Monetary Policy on Friday. Here are the Reactions coming from various Chief Economists of Brokerage / Research Houses.

Ritika Mankar Mukherjee of Ambit Capital said,

RBI governor’s first monetary policy review, the RBI normalised the MSF-repo rate corridor (effectively by 100bps) and increased the repo rate by 25bps. In view of the RBI’s explicit focus on inflation, we reiterate our view that repo rate increases of another 25-50bps are likely to be administered over the rest of FY14. This is likely to be accompanied by the continued stabilisation of the MSF corridor from September to October 2013, as the next Fed meeting is scheduled for end-October 2013. There is a high probability that the next round of intervention is administered in mid-October 2013 i.e. ahead of RBI’s early-November policy review and ahead of the Fed’s end-October policy review

Citigroup Analyst Anurag Jha made the following observation,

Yesterday, we were surprised by the Fed’s decision to not taper asset purchases and today we have been equally surprised by RBI’s decision to raise the Repo rate. With the latest print on GDP the weakest since the Lehman crisis (4.4% in 1Q) and core WPI inflation at a 44-month low (1.9% in Aug), the market had little reason to expect a repo rate hike. Today’s rate hike, however, would have been a bigger surprise had the new governor not hinted at a changing paradigm of monetary policy in his first speech. The speech hinted at a rising influence of CPI and the diminishing role of core WPI inflation in the policy formulation exercise.

Robert Prior-Wandesforde of Credit Suisse said,

Rajan seems to be signalling two things. First, that he wants some normalisation of the yield curve, which is currently much inverted. Second, that the level market interest rates eventually fall to should be higher than was the case before the introduction of Subbarao’s liquidity measures given the heightened inflation risks. If our interpretation is right, then this will ultimately bode badly for economic growth, but well for inflation and the exchange rate

Bharat Iyer of JP Morgan said,

The RBI’s decision to hike the repo rate appears to be driven by two considerations – inflationary pressures and an actual interest rate defense of the INR (higher rates are required to incentivize Banks to attract FCNR deposits too). Short rates are expected to remain volatile. But the long end could stay elevated in response to the repo rate hike and the hawkish statement.

Sonal Verma of Nomura Securities said,

Dr. Raghuram Rajan brings more clarity on the instrument (repo) versus objective (CPI inflation/inflation expectations) instead of the stealth tightening route followed thus far. For the economy, this means that interest rates will be much higher than assumed thus far and growth weaker in the near-term. We are currently reviewing our interest rate forecasts.

Indranil Sen Gupta of BOFA Merrill Lynch said,

We welcome Gov Raghuram Rajan’s decision to continue to roll back July tightening measures.”…it is now possible for the Reserve Bank…”, his policy just noted, “…to contemplate easing these exceptional measures in a calibrated manner…”. The MSF rate cut of 75bp, in fact, was deeper than our 50bp expectation. At the same time, the RBI unexpectedly hiked the LAF repo rate by 25bp to contain inflation expectations as inflationary pressures from INR depreciation will offset the fall in agflation due to a better monsoon. On balance, we estimate that the RBI’s effective repo rate will still come off to 8.49% from 8.73% earlier

The Stock Market which were overheated dropped after the announcement of the RBI Policy ending the 2,000 point rally on BSE SENSEX 🙂

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