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The Reserve Bank of India (RBI) is expected to adopt further 50bps of cumulative cuts going forward, following today’s dovish monetary polish statement, when the central bank already cut the benchmark interest rate by 25bp for the fifth straight time this year, according to the latest report from ANZ Research.
The RBI’s move was still less aggressive than what we anticipated. Five members voted for a 25bp cut versus one who favoured a 40bp cut. Nonetheless, all voted to retain an accommodative stance. Growth projections were revised sharply lower, with inflation forecasts for the next one year remaining benign.
The decision to cut was unanimous although it was split 5-1 in favour of a 25bp cut versus a 40bps cut. On being prodded for why the MPC did not cut by 40bps despite growth slowing to 5 percent in Q1 FY20, RBI Governor Shaktikanta Das said it was worthwhile to wait and assess the impact of policy easing done so far (both monetary and fiscal).
That said, the RBI lowered its GDP projections sharply for FY20 (fiscal year ending March 2020) to 6.1 percent with risks evenly balanced from 6.9 percent in the previous policy meeting (5.3 percent in Q2 FY20, 6.6-7.2 percent in H2 FY20 and 7.2 percent in Q1 FY21). They noted that the negative output gap has widened further.
The Monetary Policy Committee (MPC) accepted that the transmission of rate cuts has remained “staggered and incomplete.” It noted that the transmission of the cumulative 110bps of cuts made between February and August to the ‘weighted average lending rate (WALR)’ on fresh rupee loans was only 29bps. The WALR on outstanding rupee loans in fact, increased by 7bps during the same period.
While the MPC statement did not raise any concerns over fiscal slippage post the corporate tax cuts announced in September, the RBI Governor said that for now it takes the government’s assurance of meeting the fiscal deficit for FY20 as a given, the report added.
