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MOSL: ECOSCOPE-RBI cuts repo rate; lowers GDP growth forecast

ECOSCOPE: RBI cuts repo rate; lowers GDP growth forecast

 

• The Reserve Bank of India (RBI) cut its repo rate by 25bp to 5.15%, taking the cumulative cut to 135bp for CY19. The monetary policy stance was maintained as ‘accommodative.’ The decision to cut the repo rate and maintain the stance was unanimous, with one of the six MPC members (Dr Ravindra H. Dholakia) voting for a cut of 40bp.
• While the RBI revised up its 2QFY20 inflation forecast to 3.4% from 3.1%, it kept the 2HFY20 estimate unchanged at ~3.6%. With inflation averaging ~3.2% over Jul-Aug’19, this implies that the central bank expects inflation at ~3.9% in Sep’19, similar to our estimate of 3.8%. Lower inflation projection for 2HFY20, however, is surprising.
• After real GDP growth came in at six-year-low of 5% YoY in 1QFY20, the RBI lowered its FY20 growth forecast from 6.9% earlier to 6.1%. Notably, while the RBI expects 2QFY20 GDP growth at 5.3% – much lower than market expectations, it forecasts a sharp revival to ~6.9% in 2HFY20.
• With the repo rate at 5.15%, the real interest rate will fall to ~1.5% for 2HFY20 (assuming the RBI’s inflation forecasts). Further rate cuts, thus, would depend on the incoming data. Our numbers suggest that headline inflation could touch 4% in Oct’19 and average ~4.7% in 4QFY20, primarily due to higher food inflation driven by a very low base (an average decline of 1.5% YoY in food prices in 2HFY19). This, in our view, limits the scope of further rate cuts. However, if inflation stays sub-4% as the RBI expects, there could be a space of 1-2 more rate cuts in the remainder of FY20.