RBI Aug 2019 meeting preview - 25bps rate cut priced in but more required

Market expects the August 2019 MPC to vote for a cut in Repo rate by 25 bps today, with a 6-0 voting pattern, driven by growing domestic and global growth concerns.  Any signal by the MPC that showcases intent to maintain adequate system liquidity on a sustained basis would infuse confidence and aid in better transmission.

Following points are worth noting for rate cut this morning:

Domestic growth revival required

Post a weak Q4, expectation of a Q1 FY2020 GDP growth around ~5.8% YoY is a real possibility with downside bias. High frequency indicators are pointing towards consumption based slowdown in both urban and rural areas though recent FMCG results show low oil prices aiding margins somewhat. Private investment has also been muted and the stress in the real estate sector could lead to further weakness in the sector. While lowering of borrowing costs could help revive growth at the margins, risk aversion in other financial market segments, could provide downside risks to the growth projections.

Highly volatile Global environment

While the events of Fed rate cut and Yuan depreciation has led to severe global risk aversion recently, growth in most parts were showing signs of weakness leading central banks to move towards accommodation stance with NZ being latest to cut rates this morning. Trend of easing is similar in other EMs as well. This will give MPC additional room to reduce rates. 

Benign domestic inflation

Headline CPI inflation is expected to average ~3.5% this fiscal within MPC 4% target. Food inflation could see pockets of surge led by vegetable and pulses but huge buffer stocks in cereals would prevent food inflation to become generalized.  Moreover, core inflation would remain muted as growth impulses continue to remain sub-optimal. Risks to inflation from a deficient monsoon are also subsiding with IMD reporting all India rainfall at just ~7% below normal for the period June 1 – August 5, 2019. Brent Crude prices are also expected to average USD 65/bbl for the fiscal.  

Acharya exit turns MPC more dovish

With ex-governor Patel exit in Dec and deputy governor Acharya exit, MPC now bears a distinct dovish look.  Dholakia has been the biggest advocate of lower interest rates and regards the inflationary concerns of fiscal slippage as "both misconceived and misplaced". Dua, while recognising fiscal slippage as an upside risk to inflation, has always voted with the governor and shows little sign of changing the trend. And Patra's transformation from the most hawkish MPC member to a dove at the turn of the year has surprised a fair number of people. With Acharya gone and MPC stance turning accommodative in last meeting, more rate cuts can be expected.

Das shooting off the cuff

The RBI governor made a totally irrelevant and meaningless comment recently. What he said implies that the liquidity measures taken by RBI in recent past is equivalent to 25bps rate cut. This prompted market participants to believe that MPC may actually not cut rate any further in today's meeting. Consequently, the already depressed market sentiments sank a little deeper. However, from the minutes of last MPC meeting, it is clear that the policy stance may remain accommodative in future. MPC had outlined that supporting economic growth is primary priority as the objective of price stability has been reasonably achieved.


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