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MOSL: ECOSCOPE-RBI cuts policy rate by 25bp, maintains neutral stance; Don’t expect another rate cut in Jun’19

ECOSCOPE: RBI cuts policy rate by 25bp, maintains neutral stance; Don’t expect another rate cut in Jun’19; could happen at a later stage

 

• 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 and consensus.
• 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^th 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.