RBI: further easing on its way? – UOB

Researchers at UOB Group reviewed the recent and unexpected decision of the RBI to cut rates by 35 bps.

Key Quotes

“The Reserve Bank of India (RBI) has delivered an unprecedented 35bps rate cut to its benchmark rate to 5.40% from 5.75% in its latest monetary policy meeting on 7th August 2019 with immediate effect. The reverse repo rate and the marginal standing facility rate have also been cut to 5.15% and 5.65% respectively, while the cash reserve ratio has been kept unchanged at 4.0%. All six members of the MPC unanimously voted for the rate cuts. The market was pricing-in a milder 25bps rate cut, while our call was for the RBI to keep interest rates unchanged”.

“Back in RBI’s June MPC meeting, the policy-makers had adjusted its monetary stance from ‘neutral’ to ‘accommodative’. In the latest accompanying monetary policy statement, the monetary policy committee reiterated that accommodative stance. The reasons for the rate cut decision included the slowdown in global and emerging market economic activity, slowdown in crude oil prices which then further pressured inflation pressures lower, softer domestic industrial production momentum, lackluster external environment, and a rather mixed atmosphere pertaining to the services sector”.

“We think that RBI could remain on a rate cut momentum into its upcoming 4th October 2019. Although the recent cut has brought the repurchase rate to its lowest since July 2010 (5.25%), RBI still enjoys ample room to cut further owing to its record low of 3.25% back during the Global Financial Crisis of 2008/9. Moreover, the FY20 budget presented a rather ambitious target to limit fiscal deficit to 3.3% of GDP in FY20 (down from a 3.5% deficit of GDP in FY19). Fiscal deficit  as of May 2019 has clocked Rs 3.66 trillion (over 50% of budget) thus suggesting that fiscal expenditure has limited room to support economic growth into the fiscal year ahead”.