E
CO
S
COPE
RBI surprises with status quo
Rate cut in next MPC meeting unlikely
5 December 2019
The Economy Observer
As against widespread expectations of a rate cut, the Reserve Bank of India (RBI) maintained the policy repo rate at
th
5.15% in its monetary policy meeting on 5 Dec’19. With this, the reverse repo rate also stands unchanged at 4.9%. The
MPC was unanimous on its decision to maintain status quo on both rates and ‘accommodative’ stance.
Not surprisingly, the RBI revised up its inflation forecast but reduced its growth forecast sharply for 2HFY20. From 3.5-
3.7% earlier, the inflation projection is now revised to 4.7-5.1% for 2HFY20. Real GDP growth forecast for 2HFY20 is cut
from 6.6-7.2% earlier to 4.9-5.5% now. Consequently, real GDP growth forecast for FY20 has also been reduced sharply
from 6.1% earlier to 5% (down by 240bp since the Feb’19 monetary policy meet). Moreover, the inflation projection for
1QFY21 is revised upward, while the growth forecast is revised down by almost 100bp.
Interestingly, the MPC noted that there is monetary space for future action. It also decided to continue with the
accommodative stance as long as it is necessary to revive growth while ensuring that inflation remains within the
target.
Overall, an unexpected status quo confirms that the RBI prioritized rising inflation over grim economic growth. Our
estimates suggest that inflation will remain close to or above 5% by Mar’20, implying that a rate cut in the next MPC in
Feb’20 is highly unlikely. Further, since our projections suggest that inflation will retreat toward 4% only by 3QFY21,
there is a good probability of a prolonged pause over the next 3-4 quarters.
As against widespread
expectations of a rate cut,
the RBI maintained the
policy repo rate at 5.15%.
Our estimates suggest that
inflation will remain close to
or above 5% by Mar’20,
implying that a rate cut in
the next MPC in Feb’20 is
highly unlikely.
RBI keeps policy rate unchanged:
As against widespread expectations of a rate
cut, the Reserve Bank of India (RBI) maintained the policy repo rate at 5.15% in
its monetary policy meeting on 5
th
Dec’19. With this, the reverse repo rate also
stands unchanged at 4.9%. The MPC was unanimous on its decision to maintain
status quo on both rates and ‘accommodative’ stance.
2HFY20 inflation forecast revised upward…:
The RBI revised up its 2HFY20
inflation forecast to 4.7-5.1% from 3.5-3.7%. Further, the RBI expects CPI to stay
closer to 4% in 1HFY21. Factors driving the upward revision include higher prices
of vegetables, proteins, pulses, sugar etc., volatility in the financial markets, and
a likely rise in crude oil prices due to geo-political tensions.
…and growth forecasts cut sharply:
After decade-low real GDP growth of 4.5%
in 2QFY20, the RBI expects 2HFY20 growth to be between 4.9% and 5.5%, much
lower than 6.6-7.2% projected earlier. Consequently, it lowered the FY20 growth
forecast sharply from 6.1% earlier to 5% now (down 240bp from the Feb’19
monetary policy forecast of 7.4%). While the RBI expects past measures such as
monetary easing and the government’s policy initiatives to spur domestic
demand, weak domestic and external demand conditions have led to a cut in
the growth forecast for FY20.
Rate cut in next MPC meeting unlikely:
Overall, an unexpected status quo
confirms that the RBI prioritized rising inflation over grim economic growth. Our
estimates suggest that inflation will remain close to or above 5% by Mar’20,
implying that a rate cut in the next MPC in Feb’20 is highly unlikely. Further,
since our projections suggest that inflation will retreat toward 4% only by
3QFY21, there is a good probability of a prolonged pause over the next 3-4
quarters.
Nikhil Gupta – Research Analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 6129 1555
Yaswi Agarwal
– Research Analyst
(Yaswi.Agarwal@motilaloswal.com); +91 22 7193 4196
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
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Exhibit 1: RBI keeps repo rate unchanged at 5.15%
8
7
6
5
(%)
Repo
Reverse repo
MSF
Exhibit 2: Liquidity balance in a comfortably surplus mode
3
2
1
0
(1)
(2)
(3)
(4)
(5)
Jun-17 Sep-17 Jan-18 May-18Sep-18 Dec-18 Apr-19 Aug-19 Dec-19
Source: RBI
Negative data implies a liquidity surplus and vice-versa
Data till 4 Dec, 2019
Source: RBI
th
(% of NDTL)
Liquidity deficit
Exhibit 3: RBI raises 2HFY20 inflation projection…
Exhibit 4: …but cut FY20 GDP growth forecast further
Source: RBI
Source: RBI
5 December 2019
2
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5 December 2019
4