Mitul Kotecha, senior emerging markets strategist at TD Securities, notes that the RBI has cut its repo rate by 25bps to 5.75% as expected and shifted to an accommodative stance in a unanimous vote.
Key Quotes
“This is likely to bode well for IGBs, while INR benefits from lower oil. The RBI was downbeat on global growth, raising concerns about the impact of an escalation in trade wars, but sounded more positive on a pick up in investment activity. RBI cut its growth forecast, with GDP cut to 7.0% for FY20 from 7.2% previously. This was not surprising, given the weakness in exports and private consumption.”
“CPI forecasts were cut to 3.4%-3.7% for Oct-Mar. Higher food prices point to some upside risks but we expect this to reverse later in the year. The widening output gap is acting as a downward weight on inflation as reflected in softening core CPI. The RBI did not announce measures to inject durable liquidity but in usual RBI style decided to form a panel to review liquidity norms, which we think will ultimately lead to measures to assure that liquidity deficits are limited.”
“We now think RBI will ease further in the months ahead, with at least one more rate cut on the horizon, if not two, with the next one possibly taking place at the August RBI meeting.”
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