Inge Klaver, analyst at Nordea Markets, notes that the Reserve Bank of India (RBI) has delivered a fourth rate cut in a row today with the size of the cut of 35 bps being larger than expected however, showing that the RBI is serious about reviving the slowing economy.
Key Quotes
“The repo rate now stands at 5.40%, the lowest since April 2010, and it was unanimously decided to keep the stance unchanged at “accommodative”. Four members of the MPC voted for a 35bp cut today, whereas two voted for the expected 25bp. This option did not come as a complete surprise, as Das had expressed that he feels the time has come to “think out of the box” and “challenge conventional wisdom” in a speech held at the IMF back in April. In his view, a decrease by 35bp would be suitable for a central bank that prefers to be “accommodative but not overly so”.”
“With inflation close to target, addressing growth concerns assumes the highest priority of the central bank at this point. Real GDP growth for 2019-20 is revised downwards from 7.0% y/y in the June policy meeting to 6.9% y/y motivated by various weakening domestic indicators, among which industrial growth, exports and a strong slowdown in the auto sector.”
“Headline inflation has been below the RBI’s medium-term target of 4% since July last year. Core CPI however, excluding the volatile components of food and fuel, has landed just above the inflation target in June.”
“While the repo rate had already been cut by a total of 75bp in the current cycle, the transmission to bank lending rates remains weak, and most of the bigger banks have lowered their lending rates only by about 20bp. A continuation of the cutting cycle and appropriate provision of liquidity in the banking system should send a signal to banks to cut lending rates.”
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