India: Economy is expected to contract further this year – UOB

Barnabas Gan, Economist at UOB Group, reviewed the recent decision by the RBI to reduce its repo rate further.

Key Quotes

“The Reserve Bank of India (RBI) reduced its policy repo rate by 40 basis points to 4.0% in an unscheduled monetary policy meeting on 22 May 2020.”

“The tone in the latest RBI statement remains negative. Risks are highly pronounced at this juncture, led by the plunge in domestic consumption, industrial production, trade and investment.”

“Policy-makers now expect economic growth to stay negative for the whole of the fiscal year 2020/21, although some pick-up is expected in 2HFY2020 given favourable base effects.”

“Inflation outlook however remains uncertain, as higher food prices given the lockdown may be counteracted by low energy prices. Nonetheless, the path of least resistance is for inflation to ease into 2HFY2020, though much will depend on COVID-19 and the recovery after the pandemic dissipates.”

“RBI had explicitly stated that “more (policy) space will open up to address the risks to growth”, even after today’s surprise 40bps cut to its repo rate. As such, we pencil in another 50bps cut for the remainder of this year for the benchmark rate to touch 3.5% by end-2020.”