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MOSL: ECOSCOPE-RBI turns dovish, cuts policy rates; High probability of one more rate cut in April

ECOSCOPE: RBI turns dovish, cuts policy rates; High probability of one more rate cut in April

 

• The Reserve Bank of India (RBI) cut its policy rate by 25bp and changed its stance to 'neutral' from 'calibrated tightening'. The decision to cut rates was in line with , but in contrast to consensus of a status quo.
• The central bank cut its 4QFY19/1HFY20 CPI inflation projections sharply by 40bp/70bp to 2.8%/3.3%. It also cut its FY19/20 GDP estimates to 7.2%/7.4% from 7.4%/7.6% earlier.
• The recent policy also opens up the probability of another rate cut in Apr'19. The RBI cut its 4QFY19 inflation forecast from 3.2% to 2.8%; however, our estimates suggest that inflation would be closer to ~3.2% in Jan-Mar'19. If so, the RBI would revise up its FY20 inflation projection. While this may dent the chances of a rate cut in Apr'19, if our expectations of materialize, this could allow the RBI to deliver another rate cut.
• We believe that record borrowings by the governments (center + states) in Feb-Mar'19, along with usual year-end liquidity tightening and election-led factors, could prompt the RBI to support liquidity by announcing aggressive OMO purchases (of up to INR800b) in Mar'19.