Our view on the RBI policy - 6th June 2019
KEY HIGHLIGHTS OF THE MONETARY POLICY
- In line with our expectations, the RBI cut repo rate by 25 bps to 5.75%
- Monetary Policy Committee (MPC) changed its stance from "neutral" to "accommodative"
- MPC voted unanimously in favour of rate cut and change of stance
- RBI intends to continue injecting durable liquidity in to the banking system
The policy was very positive and was reinforced by the unanimous voting and the change in stance to "accommodative". The statement’s focus on supporting growth and bolstering private investment as long as inflation remains within the mandate is also encouraging and leads us to believe that more accommodation is on the cards.
Our own expectations for growth and inflation for FY2020 also underscore this view as we expect headline inflation to average under 4% and have revised our growth forecasts lower. Key risks to inflation trajectory could arise from monsoon turn out, unseasonal spikes in vegetable prices, crude oil prices, geo-political tensions, financial market volatility and the fiscal scenario.
The setting up of an internal committee for liquidity framework review by RBI is a welcome step. We believe it will help to reduce the information asymmetry regarding systemic liquidity and will benefit not only markets but also banking decisions as regards, deposit-taking, lending, and transmission. Also the constitution of this committee suggests that the focus is likely to make the transmission process more efficient. Further, in light of the recent upheavals in the NBFC (non-banking financial company) space, the governor's statement that "all necessary steps would be taken to maintain financial stability" is reassuring.
Given the downside risks to growth, we expect one more rate cut (25 bps) in August ‘19. Contingent on inflation risks remaining contained, there could be a 25 bps rate cut in the October ’19 meeting as well. In our view it primarily means that the RBI’s main focus now is transmission given growth and financial stability concerns. While this could come from more easing as there is scope for further growth disappointment relative to the RBI’s forecasts, it will mostly come via better liquidity management, for which the RBI has set up a committee to review its liquidity framework.
Data Source: RBI
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