RBI cuts policy rate by 25bp, maintains neutral stance
Don’t expect another rate cut in Jun’19; could happen at a later stage
4 April 2019
The Economy Observer
The Reserve Bank of India (RBI) cut policy rates by 25bp to 6% and maintained its neutral stance. The decision to cut
rates was in line with both
The central bank expects 4QFY19 CPI inflation at 2.4%, lower than the 2.8% projected in Feb’19 policy and also lower
than our estimate of 2.5%. It estimates inflation of 3.3% in FY20 (~3% for 1HFY20 v/s earlier forecast of 3.3% and lower
than our estimate of 3.2%; ~3.7% for 2HFY20 v/s earlier forecast of 3.9% and much lower than our estimate of 4.5%).
The RBI has also revised its GDP growth forecast downward to 7.2% for FY20 (1HFY20 at ~7% and 2HFY20 at ~7.4%),
from the 7.4% projected in the Feb’19 policy. We, however, expect growth at ~6.7% in FY20.
In our view, further rate cuts would happen only if inflation and/or GDP growth turns out to be lower than the RBI’s
projections. We believe that inflation will be higher than the RBI’s forecast in 1QFY20, while real GDP growth will be
lower at ~6.7% in FY20. If so, we don’t expect another rate cut in the next monetary policy on 6 Jun’19. Nevertheless,
weaker GDP growth could make a case in subsequent policies (more likely in Oct’19 than in Aug’19). Thus, the RBI may
stay on hold for now.
RBI cuts policy rates – in line with our expectations…:
As was our expectation,
the MPC on 4
Apr’19 cut its policy repo rate by 25bp to 6.0%. Consequently,
the reverse repo rate stands at 5.75% and the marginal standing facility (MSF)
rate at 6.25%
The move was also in line with consensus. The repo
rate was cut with a 4-2 majority, with Dr Viral Acharya and Dr Chetan Ghate
voting against the move in favor of a status quo. As for the stance, the MPC
decided to keep it as neutral. While five members of the MPC voted in favor of
the decision on stance, Dr Ravindra H. Dholakia voted to change it to
…and cut its inflation forecast further downward…:
The RBI expects 4QFY19 CPI
inflation at 2.4%, lower than the 2.8% projected in Feb’19 policy and also lower
than our estimate of 2.5%. The central bank expects Mar’19 inflation at 2.6% v/s
our estimate of 2.9%. The lower projection by the RBI is supported by deflation
in food, lower-than-expected core inflation, moderation in households’
expectation of inflation, and producers’ expectation of sustenance of the
current level of input-output prices over the medium term. However, beyond
the medium term, the RBI assumes certain risks on the upside such as below-
normal monsoon (as was predicted by Skymet), uncertainty about softer
inflation in select fuel items, recent slowdown in economic activity and financial
market volatility. The RBI estimates inflation of 3.3% in FY20 (1HFY20 at ~3% v/s
earlier forecast of 3.3% and lower than our forecast of 3.2%; 2HFY20 at ~3.7%
v/s earlier forecast of 3.9% and much lower than our forecast of 4.5%).
…along with a cut in growth projections:
The RBI has also revised its GDP
growth forecast downward to 7.2% in FY20 (1HFY20 at ~7% and 2HFY20 at
~7.4%) from the 7.4% projected in the Feb’19 policy. We, however, expect
growth at ~6.7% in FY20. Factors leading to the downward revision were
moderation in the global economy (which might impact India’s exports) and
weaker domestic investment activity. Negative output gap and sluggish private
investment were mentioned by the RBI has major threats.
Nikhil Gupta – Research analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 6129 1555
Yaswi Agarwal – Research analyst
(Yaswi.Agarwal@motilaloswal.com); +91 22 7193 4196
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