RBI Monetary Policy 2019: Forget 25 bps rate cut, Governor Shaktikanta Das may go for larger revise

Since the last two RBI policy meets, the prediction for a rate cut by 25 basis points has been making rounds. Now, on Thursday, majority of experts are expecting similar decision from the Reserve Bank of India (RBI) governor Shaktikanta Das who is just few hours away from announcing the second bi-monthly monetary policy for FY20. Das, along with MPC members, equally will vote for their stance in this monetary policy, followed by majority decision. Interestingly, looks like RBI has more room than just 25 basis point rate cut this policy.

Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser at SBI said, "Domestic growth impulses remain very weak. Firstly, the percentage of leading indicators showing an acceleration is below 50% since January. Out of 1623 entities that saw rating action in terms of rating upgrades and downgrades for all rating agencies for the period 1April 2019 to 31st May 2019, the number of entities downgraded surpassed the upgrades. With the Government bound by model code of conduct during elections, it is possible that industries like Construction may have higher receivables now, but it is likely to improve with better Government spending in the coming months. Corporate results have also been lackluster in Q4FY19."

While India's Q4FY19 GDP numbers which came in at 5.8%, Ghosh says, "it is likely that growth rate will stay below 6% at least in H1FY20, only to recover in H2FY20."

On global growth, Ghosh states that the trade war is becoming more severe with US getting more impacted. For example, more than 800 U.S. food and agricultural products have been subject to retaliatory tariffs from China, the EU, Turkey, Canada and Mexico. This could be a reason for the slowing exports growth of agricultural products from US and US exports contracting more than US imports. With nearly 20% of farm income derived from exports, trade war will thus impact the US farmers to a considerable extent. Based on anecdotal evidence, we now expect that US may plunge into a slowdown mode possibly towards the end of 2019. Markets now expect that the US Fed will cut rates in quick succession. A June cut probability was 6% last week, now it is 32.4%. July cut probability is 65% and September cut probability is 95%.

Against these factors, Ghosh expects a rate cut of at least 25 bps in the forthcoming policy, if not more.

"We expect RBI to spell clearly its stand on how a large cut if impacted will lead to better transmission: will the banks be now mandated for benchmarking their asset and liability moving together? Otherwise, banks will not rate cut deposit rates given the huge currency leakage. The other argument of bringing down the deposit rates if the Government cuts deposit rates on small savings is difficult, as small savings now finance 20% of fiscal deficit, as against 2.5% in FY14," Ghosh added. 

Finally, Ghosh reiterates saying, " Clearly, the reliance on such schemes has increased manifold with the Government reducing its reliance on market borrowings. We thus believe a larger rate cut coupled with specific instructions on liquidity (middle ground of a CRR adjustment, the impact of which is instantaneous) coupled with a budget laying down a manageable fiscal consolidation roadmap will help rev up the economy."

If not 25 basis points, then one can expect a larger 50 basis point cut in policy repo rate. 

Currently, India’s policy repo rate stands at 6%, with reverse repo rate under LAF adjusted at 5.75%. The marginal standing facility (MSF) rate and bank rate stands at 6.25%.

If policy repo rate does go down between 5.50% to 5.75% - this would be witnessed for the first time in 9 years. The last time when India’s policy rate stood near these levels were back in July 2010.

Ahead of RBI policy, the Sensex was trading at 39,934.56 down by 148.98 points or 0.37%. While, the Nifty 50 was performing at 11,957.75 down by 63.90 points or 0.53% at around 1037 hours.