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    More RBI repo rate cuts in FY20? Here's what brokerages expect

    More RBI repo rate cuts in FY20? Here's what brokerages expect

    More RBI repo rate cuts in FY20? Here's what brokerages expect
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    By Pranati Deva   IST (Updated)

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    The Reserve Bank of India's Monetary Policy Committee (MPC) cut the repo rate by 25 bps to 5.15 percent in its October meet on Friday in a bid to boost the flagging economic growth in the country. However, the RBI cut its FY20 gross domestic product (GDP) growth forecast 80 bps to 6.1 percent from 6.9 percent and stated that the negative output gap has widened further.

    The Reserve Bank of India's Monetary Policy Committee (MPC) cut the repo rate by 25 bps to 5.15 percent in its October meet on Friday in a bid to boost the flagging economic growth in the country. However, the RBI cut its FY20 gross domestic product (GDP) growth forecast 80 bps to 6.1 percent from 6.9 percent and stated that the negative output gap has widened further and there is policy space to address growth concerns within its flexible inflation-targeting mandate.
    Governor Shaktikanta Das indicated the central bank would maintain its present "accommodative" stance as long as it was required to revive growth. Given the RBI’s own assessment of the economy, analysts believe that the 25 bps cut was a tad disappointing and a more aggressive stance was warranted.
    Going ahead, Edelweiss expects the central bank to take the repo rate to 4.5 percent (another 65 bps cut) by FY20 — India’s lowest policy rate. The rate cut, along with a fiscal stimulus, is the need of the hour to revive the economy, especially given negative growth impulses from the global economy as well, the broekrage said. "In our view, the fiscal/monetary easing will not harm macroeconomic stability as most central banks are in easing mode," it added.
    CLSA also noted that the rate cut was in-line with their expectations. The RBI has now cut rates for a fifth consecutive meeting. There are two remaining meetings this fiscal year (December and February) and CLSA's central case is for 25 bps reductions at each for an end-FY20 forecast of 4.65 percent. Thereafter, it expects the pace of rate cuts will slow. CLSA expects one further rate cut in FY21 bringing the repo rate to 4.4 percent in FY21. However, if growth undershoots expectations the central bank will do more, it added.
    Rate cuts thus far have done nothing to reverse the decline in credit growth that intensified with India’s non-bank financial company (NBFC) crisis in Q4FY18. Governor Das indicated the RBI would not allow another big shadow bank to fail and that the sector would remain under intense central bank scrutiny. Ensuring an effective transmission mechanism is more important in the current environment than monetary policy per se.
    Hence, the RBI’s mandate that, from October 1, banks will have to link the pricing of new floating rate loans explicitly to an external benchmark such as the RBI repo rate.
    According to CLSA, this is positive and implies improved transmission of central bank policy going forward but it will not immediately improve the financial situation for developers. The global brokerage, therefore, remains cautious about the near-term growth and inflation outlook.
    Meanwhile, Goldman Sachs sees a high probability for the MPC to deliver a final 25 bps cut in December. It expects the easing cycle to pause after the December cut and does not see space for further rate cuts beyond Q4.
    Morgan Stanley also expects one more cut in December meeting as the dovish tone by the RBI keeps the room open for easing. It added that the risk of further easing will depend on the pace of growth recovery.
    HSBC also expects another 25 bps rate cut in December, taking the repo rate to 4.9 percent. Wide output gap and subdued inflation warrant further easing, the brokerage said, adding that fiscal stimulus can help close about 60-70 percent of the output gap.
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