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This article is more than 1 year old.

Does growth trump inflation? Analysts expect another 25 bps rate cut in December MPC meeting

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Post the poor show in Q2 GDP data, analysts expect RBI to further cut repo rate despite rise in inflation.

Does growth trump inflation? Analysts expect another 25 bps rate cut in December MPC meeting
The gross domestic product (GDP) growth for the second quarter (July-September) of the financial year 2019-20 dropped to 4.5 percent, the weakest pace in more than six years. The economy had expanded at 5 percent in the first quarter of 2019-20, its slowest annual pace since 2013. Post the poor show in Q2 GDP data, analysts expect the RBI to further cut repo rate despite rise in inflation.
Domestic brokerage Motilal Oswal Financial Services (MOSL) believes that the Monetary Policy Committee (MPC) now will likely prioritise growth slowdown over high inflation, and thus might cut the rate by another 25 bps in its next meeting on December 5, 2019.
As per the brokerage, weakness in real GDP growth was entirely driven by investment, as consumption increased during the quarter led by both private and government consumption. Notably, external trade fared well in Q2FY20 as the decline in imports was much steeper than exports.
"Overall, there were hardly any surprises in the 2QFY20 GDP growth data. Nevertheless, we believe that the expectation of better growth in 3QFY20 may not pan out as leading indicators suggest that October 2019 – a festive month – was the worst in the current cycle. Therefore, growth could weaken further to 4 percent in Q3FY20, which will mark a trough," the report explained.
Bank of America Merill Lynch also expects the RBI to cut 25 bps on December 5 after growth fell further in the September quarter. The reduction in repo rate is expected despite the rise in inflation as it is driven by hike in onion prices. They also expect another 15 bps rate cut in the February policy as well.
Deepthi Mary Mathew, Economist at Geojit Financial Services, also believes that the RBI will cut the rates by 25 bps in the upcoming MPC meeting.
"Though retail inflation has breached 4 percent in October, touching a 16-month high of 4.62 percent, core inflation is at its low. The retail core inflation was reported at 3.46 percent in October and wholesale core inflation at -1.6 percent. The figures reflect the slowdown of consumer demand in the economy. The GDP growth rate at 4.5 percent for Q2FY20, lowest in the last 26 quarters, will also push the RBI for more rate cuts," Mathew stated.
Going ahead, MOSL cut their growth forecast from 5.7 percent earlier to 4.5 percent for FY20, while BofAML reduced their FY20 growth forecast by 40 bps to 5.1 percent.
Meanwhile, HSBC forecasts GDP to grow 4.9 percent in FY20 and 5.9 percent in FY21. It also expects a 25 bps repo rate cut in the December policy meeting.
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