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RBI cuts policy rate by 25bp, maintains neutral stance

Don’t expect another rate cut in Jun’19; could happen at a later stage

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4 April 2019

The Economy Observer

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The Reserve Bank of India (RBI) cut policy rates by 25bp to 6% and maintained its neutral stance. The decision to cut

rates was in line with both

our expectation

and consensus.

The central bank expects 4QFY19 CPI inflation at 2.4%, lower than the 2.8% projected in Feb’19 policy and also lower

than our estimate of 2.5%. It estimates inflation of 3.3% in FY20 (~3% for 1HFY20 v/s earlier forecast of 3.3% and lower

than our estimate of 3.2%; ~3.7% for 2HFY20 v/s earlier forecast of 3.9% and much lower than our estimate of 4.5%).

The RBI has also revised its GDP growth forecast downward to 7.2% for FY20 (1HFY20 at ~7% and 2HFY20 at ~7.4%),

from the 7.4% projected in the Feb’19 policy. We, however, expect growth at ~6.7% in FY20.

In our view, further rate cuts would happen only if inflation and/or GDP growth turns out to be lower than the RBI’s

projections. We believe that inflation will be higher than the RBI’s forecast in 1QFY20, while real GDP growth will be

th

lower at ~6.7% in FY20. If so, we don’t expect another rate cut in the next monetary policy on 6 Jun’19. Nevertheless,

weaker GDP growth could make a case in subsequent policies (more likely in Oct’19 than in Aug’19). Thus, the RBI may

stay on hold for now.

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RBI cuts policy rates – in line with our expectations…:

As was our expectation,

the MPC on 4

th

Apr’19 cut its policy repo rate by 25bp to 6.0%. Consequently,

the reverse repo rate stands at 5.75% and the marginal standing facility (MSF)

rate at 6.25%

(Exhibit 1).

The move was also in line with consensus. The repo

rate was cut with a 4-2 majority, with Dr Viral Acharya and Dr Chetan Ghate

voting against the move in favor of a status quo. As for the stance, the MPC

decided to keep it as neutral. While five members of the MPC voted in favor of

the decision on stance, Dr Ravindra H. Dholakia voted to change it to

accommodative.

…and cut its inflation forecast further downward…:

The RBI expects 4QFY19 CPI

inflation at 2.4%, lower than the 2.8% projected in Feb’19 policy and also lower

than our estimate of 2.5%. The central bank expects Mar’19 inflation at 2.6% v/s

our estimate of 2.9%. The lower projection by the RBI is supported by deflation

in food, lower-than-expected core inflation, moderation in households’

expectation of inflation, and producers’ expectation of sustenance of the

current level of input-output prices over the medium term. However, beyond

the medium term, the RBI assumes certain risks on the upside such as below-

normal monsoon (as was predicted by Skymet), uncertainty about softer

inflation in select fuel items, recent slowdown in economic activity and financial

market volatility. The RBI estimates inflation of 3.3% in FY20 (1HFY20 at ~3% v/s

earlier forecast of 3.3% and lower than our forecast of 3.2%; 2HFY20 at ~3.7%

v/s earlier forecast of 3.9% and much lower than our forecast of 4.5%).

…along with a cut in growth projections:

The RBI has also revised its GDP

growth forecast downward to 7.2% in FY20 (1HFY20 at ~7% and 2HFY20 at

~7.4%) from the 7.4% projected in the Feb’19 policy. We, however, expect

growth at ~6.7% in FY20. Factors leading to the downward revision were

moderation in the global economy (which might impact India’s exports) and

weaker domestic investment activity. Negative output gap and sluggish private

investment were mentioned by the RBI has major threats.

Nikhil Gupta – Research analyst

(Nikhil.Gupta@MotilalOswal.com); +91 22 6129 1555

Yaswi Agarwal – Research analyst

(Yaswi.Agarwal@motilaloswal.com); +91 22 7193 4196

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on

www.motilaloswal.com/Institutional-Equities,

Bloomberg, Thomson Reuters, Factset and S&P Capital.



Don’t expect another rate cut in Jun’19; could happen at a later stage:

Further

rate cuts would happen only if inflation and/or GDP growth turns out to be

lower than the RBI’s projections. We believe that inflation will be higher than

the RBI’s forecasts in 1QFY20, while real GDP growth will be lower at ~6.7% in

FY20. If so, we don’t expect another rate cut in the next monetary policy on 6

th

Jun’19. Nevertheless, weaker GDP growth could make a case in subsequent

policies (more likely in Oct’19 than in Aug’19). Thus, the RBI may stay on hold for

now.

Exhibit 2: Liquidity remains in deficit mode

MSF

3

2

1

(% of NDTL)

Liquidity deficit

Exhibit 1: RBI cuts policy rates by 25bp to 6%

7

Repo

Reverse repo

6

0

(1)

(2)

(3)

(4)

(5)

Apr-17

Source: RBI

Aug-17

Nov-17 Mar-18

Jul-18

Nov-18 Mar-19

Source: RBI

5

Exhibit 3: RBI revises inflation forecast downward…

Exhibit 4: …and cuts 1HFY20 GDP growth projections

Source: RBI

Source: RBI

4 April 2019

2

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Expected return (over 12-month)

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SELL

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4 April 2019

4