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MOSL: ECOSCOPE-RBI surprises with status quo; Rate cut in next MPC meeting unlikely

ECOSCOPE: RBI surprises with status quo; Rate cut in next MPC meeting unlikely

 

• 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 5th 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.