Indian economy to gradually start recovering by Q4, RBI may further cut rates by 25-50 bps

The USD/INR pair eased a bit yesterday to 75.70 and reversed all of the gains last Friday after the Reserve Bank of India’s unexpected rate cut of 40 basis points to 4 percent, noted Commerzbank in a research report. RBI might possibly be pleased to see the relative stability in USD/INR. This is not only after the surprised rate cut but also for the past two months.

The central bank kept an accommodative bias and left the door open for additional easing. The committee voted 5-1 in favour of the cut with the one dissent voting for a 25 basis points cut. RBI noted the economy is severely impacted by the lockdown which has been extended many times to the end of May. The second quarter of 2020 is likely to take the brunt, while the third quarter is likely to remain weak and the recovery is expected to gather pace in the fourth quarter as supply lines are gradually restored.

“We will get Q1 GDP this Friday which is seen around 1.5 percent yoy and we should get an updated forecast for this year. Most are expecting a contraction this year e.g. by at least 2 percent and the question is one of magnitude. RBI expects inflation to continue to moderate and dip below 4 percent by Q4 2020 but we suspect it could be even earlier than this. RBI’s primary goal for now is to provide a conducive environment to revive animal spirits by ensuring adequate liquidity in the system. As long as USD-INR remains relatively stable and given downward trajectory for inflation, we could see RBI cutting by another 25-50bp as early as the next meeting on 6-August”, added Commerzbank.