India: MPC indicates more policy space to cut – Standard Chartered

Analysts at Standard Chartered note that India’s Monetary Policy Committee (MPC) reduced the repo rate by 25bps to 5.15%, in line with consensus and their expectations, while maintaining its accommodative stance.

Key Quotes

“This is the third consecutive policy meeting when MPC members voted to cut rates with full consensus – all six members voted for a cut, except one who voted in favour a larger cut of 40bps.”

“The tone of the policy statement and guidance is clearly dovish, as (1) the MPC statement acknowledged there is more policy space to address growth concerns; and (2) the committee decided to continue with its accommodative stance, as long as necessary, to revive growth while ensuring inflation is within the target. The MPC’s action and stance were not surprising after a shocking Q1-FY20 (ending June 2020) GDP print and continued weak momentum in economic activity amid benign inflationary pressures.”

“The key question is how much more policy space the MPC has, to support growth. The MPC has reduced repo rates by 135bps (including the October cut) since the beginning of 2019, amid ample liquidity conditions. While the release of the minutes in the next two weeks will provide more colour, we maintain our view that the MPC is likely to cut rates to 4.75% by FY21 as the growth recovery is likely to remain modest.”

“The MPC also sharply reduced its FY20 GDP growth projection to 6.1% (the lowest in the last six years) from 6.9%, which clearly widens the output gap and thus provides more room for rate cuts. Inflation projections were left largely unchanged. While the half-yearly monetary policy report forecasts a rebound in FY21 GDP growth to 7%, we believe this will be revised downward in future quarters. Demand has weakened and sentiment remains soft. Thus, we expect a recalibration of market expectations, which has so far seen 5% as a likely floor for policy rates in this cycle.”

“The Reserve Bank of India (RBI’s) recent decision, which mandates banks to link their lending rates with external benchmarks (like the repo rate), is another reason we believe repo rates are likely to be reduced lower than 5% in this easing cycle.”