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MOSL: ECOSCOPE-Policy rate cut by an unconventional 35bp; ‘accommodative’ stance maintained

ECOSCOPE: Policy rate cut by an unconventional 35bp; ‘accommodative’ stance maintained; Slow growth may warrant another rate cut in Oct’19

 

• In line with market expectations, the RBI cut its repo rate for the fourth time this year - by an unconventional 35bp in this meeting though - to 5.4%. With this, the central bank has cumulatively cut the policy rates by 110bp so far this year. The reverse repo rate now stands at 5.15%. Importantly, the central bank maintained its 'accommodative' stance, which is indicative of the room for another rate cut.
• Although the RBI kept its FY20 inflation forecast largely unchanged, GDP growth projections were revised down once again. Headline inflation forecast now stands at ~3.1% for 1HFY20 and 3.5-3.7% for 2HFY20 (marginally higher than the prior forecast of 3.4-3.7%). Real GDP growth forecast for FY20 was also revised down from 7.0% to 6.9%.
• While the central bank has cut rates by 110bp since the start of this year, the transmission of it to the real economy is still lagging. Thus, it needs to ensure proper transmission of the rate cuts now.
• Our estimates suggest that growth is likely to weaken to 6.2% in 1HFY20, post which we expect economic activity to gather pace. Therefore, a lower growth forecast, especially in the first half of the year, might prompt the RBI to cut policy rates by another 25bp in its Oct'19 monetary policy meeting. After this, relatively high growth, coupled with higher headline inflation (we expect inflation to cross 4% after Oct'19), might weaken the case for rate cuts. The next monetary policy meeting is scheduled on 4th Oct'19.