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MOSL: ECOSCOPE-RBI cuts policy rate by another 25bp, changes stance to accommodative

ECOSCOPE: RBI cuts policy rate by another 25bp, changes stance to accommodative; Weak growth likely to drive further rate cuts

 

• In line with market expectations, the Reserve Bank of India (RBI) cut its policy interest rates by another 25bp and changed its stance from 'neutral' to 'accommodative.' The repo rate now stands at 5.75%, while the reverse repo rate is cut to 5.5%. No other liquidity enhancing measures were announced.
• Although the RBI kept its FY20 inflation forecasts unchanged, GDP growth projections were revised down. Headline inflation forecast now stands at 3.0-3.1% for 1HFY20 (marginally higher than the prior forecast of 2.9-3.0%) and 3.4-3.7% for 2HFY20 (slightly lower than the prior forecast of 3.5-3.8%). Real GDP growth forecast for FY20 was also revised down from 7.2% to 7.0%.
• Post the rate cut, the RBI now needs to ensure that monetary easing is transmitted to the real economy. As we had discussed , short-term relief must be complemented with a long-term strategy.
• Our forecasts suggest that headline inflation would remain subdued at ~3.2% and real GDP growth would also be weak at ~6.2% in 1HFY20. If so, the RBI could cut rates again in August (and probably in October as well). As inflation crosses 4% and growth recovers to ~7% in 3QFY20, the scope for further rate cuts will diminish significantly thereafter. The next monetary policy meeting is scheduled on 7th Aug'19.