RBI POLICY – Rate Cut expectations met, guides for a Dovish stance

04 OCTOBER 2019

The Fourth Bi-Monthly Monetary Policy Statement for FY 2019-2020 was released by the Reserve Bank of India (RBI) on 4th October 2019. Following were the highlights.

1. Repo rate was cut by 25bps to 5.15% with immediate effect.

2. Stance left unchanged at “accommodative”.

Consequently, the reverse repo rate and the marginal standing facility (MSF) rate / Bank rate stand adjusted to 4.90% and 5.40% respectively.

The Monetary Policy Committee (MPC) voted unanimously to reduce policy rates, however one member voted for a higher (40bps) reduction. With the fifth consecutive rate cut, the RBI has reduced the repo rate by a cumulative 135 bps since February 2019.

Assessment & Outlook

  • Citi analysts expect the RBI to deliver another 25bps reduction in December 2019, as the 2QFY20 GDP print is unlikely to show any substantial pickup.
  • Citi analysts expect the February 2020 policy decision to be data dependent.
  • Citi analysts expect 10yr G-sec yields to drift lower towards 6.40% in the near term (10yr G-sec yields closed at 6.69% on 4th Oct19), given the unequivocally dovish forward guidance by the RBI.

RBI’s Growth and Inflation Guidance

  • Real GDP growth expectation revised down to 6.1% YoY for FY20 (from 6.9% projected in Aug19 policy).
  • GDP growth for 2QFY20 projected at 5.3% YoY, 2HFY20 to range between 6.6-7.2% YoY and 1QFY21 expected at 7.2% YoY.
  • CPI projection for 2QFY20 revised slightly upwards to 3.4% YoY (up 30bps).
  • Inflation estimates for 2HFY20 and 1QFY21 were retained at 3.5-3.7% YoY and 3.6% YoY respectively.
  • The MPC expects inflation to remain below target through 1QFY21 while keeping the 4QFY21 CPI target at 4%, indicating less worry on the inflation front.

10 yr G-Sec movement around the current & previous RBI Policies

Source: Bloomberg

Citi analysts believe that the RBI stopped short of a higher repo rate cut to retain some firepower, given uncertainty around the extent of economic slowdown. The RBI is expected to focus more on the transmission of rate cuts (135bps cumulative rate cut already done in 2019), as sticky interest on small savings appears to be a key factor hampering monetary policy transmission.

The MPC expects recent measures announced by the Government to strengthen private consumption and spur investment activity. Still they have kept the door open for further easing with a clear focus on reviving growth while keeping inflation within target, as they do not appear to be fixed on a terminal rate.

Fixed Income investors may continue to focus on high credit quality with a preference for short duration and remain diversified in their portfolios. For more details and implications for your portfolio, please contact your relationship manager.

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