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RBI cuts policy repo rate by 35 bps to 5.40 pct, likely to cut further by 50 bps
The Reserve Bank of India cut its policy repo rate by 35 basis points to 5.40 percent today, maintaining the accommodative stance. The MPC’s vote was unanimous. However, it was split 4-2 in favour of a 35 basis points cut versus a 25 basis point cut. The RBI Governor underlined that the unlikely 35 basis points cut was made to prop up aggregate demand given the inflation stayed fairly subdued. The Governor mentioned that the MPC thought 25 basis points would be inadequate while 50 basis points would seem excessive since 75 bps of cuts have already been made so far in 2019, noted ANZ in a research report.
The central bank cut its economic growth projections or FY20 to 6.9 percent with risks to the downside. It expects 5.8-6.6 percent in H1 FY20 and 7.3- 7.5 percent in H2 FY20. The RBI adjusted their inflation forecasts to 3.1 percent for the second quarter of FY20 and 3.5 percent to 3.7 percent for the second half of FY20. In the first half of FY20, inflation had averaged 3.07 percent, implying that the central bank expects inflation roughly stay at similar levels and meet its first half of FY20 forecast of 3 percent to 3.1 percent from June.
“In our estimate, the output gap is roughly at -0.7% of GDP which makes the case for further cuts. While today’s rate cut was broadly expected, the magnitude highlights the RBI’s strong dovish undertones. The narrative of weak consumption and private investment as well as slower global growth warrants further easing in our view especially given limited fiscal room. We retain our call for a further 50bps of cuts from here on”, said ANZ.