RBI POLICY – Lower Rates, Stance “Accommodative”

7 JUNE 2019

The Second Bi-Monthly Monetary Policy Statement for FY 2019-2020 was released by the Reserve Bank of India (RBI) on 6th June 2019. Following were the highlights.

1. Repo rate was cut by 25bps to 5.75% with immediate effect.

2. Stance changed to “accommodative”

Consequently, the reverse repo rate and the marginal standing facility (MSF) rate / Bank rate stands adjusted to 5.50% and 6.0%.

The Monetary Policy Committee (MPC) voted unanimously on both decisions – to cut rates and change the policy stance. With the third consecutive reduction this calendar year, the repo rate is now lowest since July 2010.

Making minor adjustments to its inflation forecast, the RBI increased its CPI guidance for 1HFY20 to 3.0 - 3.1% (up 10bps) and slightly lowered the 2HFY20 estimate to 3.4 - 3.7% (down 10bps), comfortably below the mandated target of 4% for FY20.

The MPC made a note of slowing activity in agriculture, manufacturing, consumption and domestic investment – compounded by lagging exports growth, given global trade challenges. The RBI lowered its GDP growth forecast for FY20 by 20bps, to 7.0% YoY. The RBI expects India’s GDP to grow by 6.4 - 6.7% YoY in 1HFY20 (40bps lower) and expanded the target range for 2HFY20 to 7.2 - 7.5% YoY (from 7.3 - 7.4% estimated earlier), reflecting uncertain growth environment.

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

Source: Bloomberg

Assessment & Outlook

Citi analysts continue to see a 30 - 50bps upside risk to RBI’s 2HFY20 inflation forecast. Citi analysts believe that there is room for another 25bps reduction in the policy rate to be made during the August MPC review. However, a longer rate-cut cycle would be contingent upon a sustained period of low inflation and deteriorating growth.

Bond yields pushed lower taking cues from the dovish shift in policy stance and growth concerns, closing ~9bps lower at 6.93%. Citi analysts believe the 10yr G-sec bond yields may drift further down to 6.70% over the next few weeks as the impact of the rate cut passes through, coupled with improving liquidity conditions. Fixed Income investors may continue to focus on high credit quality with a preference for short duration and remain diversified in their portfolios.

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