June 2019 MPC meeting minutes - Another rate cut in Aug?

The minutes of the June Monetary policy Committee (MPC) meeting, released by the Reserve Bank of India (RBI) last week shows that concerns about a slowdown in growth, illustrated by GDP growth hitting a 20-quarter low of 5.8% in Jan-Mar, was instrumental in unanimously voting for a 25-bps reduction in the repo rate earlier this month. The need to improve transmission to reduce real interest rates guided change in stance to accommodative. So did the benign outlook on core inflation and recent decline in oil prices. The risk to inflation as noted by several members is from food inflation which is gradually inching up.

Growth concerns took prominence
The growth in investments fell to 3.6%, a 14-quarter low. In order to kick-start the investment cycle, MPC members decided to cut rates. Since then, global growth has deteriorated. Even India’s domestic growth is likely to be lukewarm with monsoon being 45% below normal. This implies further room for easing as inflation projections remain below target and higher weightage needs to be assigned to growth as compared to previous meetings.  
Inflation outlook remains balanced
MPC members observed that the recent decline in core inflation (90bps in two months) suggests that underlying demand is weak (core inflation - ex food & fuel is a better indicator of future inflation as it is more persistent). While core inflation is likely to come down further, food inflation has and is likely to increase due to a base effect as also below normal rainfall. Prices of vegetables, pulses and certain protein items will go up. Even if this happens, MPC inflation target of 4% is unlikely to be breached as global oil prices have receded and will provide comfort.
Another rate cut in August
Inadequate transmission of rate cuts emerged as an underlying theme in the minutes. Since the policy, India’s 10Y yield has fallen by 23bps, in-line with US 10Y (11bps decline). As per minutes, 6% policy rate is optimal for fiscal slippage of 0.5% or a 10% spike in oil prices. However, a policy rate of 5.75% will provide growth stimulus. Given the commentary from US Fed and ECB since RBI policy, we believe the current global and domestic economic context implies room for another 25bps cut in Aug’19 

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