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Deutsche Bank: RBI MPC minutes indicate likely rate cuts in October and December

Updated : August 22, 2019 11:04 AM IST

The Reserve Bank of India (RBI) Monetary Policy Committee (MPC) reduced the repo rate by 35 basis points in August. The minutes of the meeting were released on Wednesday.

Sameer Goel, head of Asia macro strategy at Deutsche Bank, in an interview with CNBC-TV18 said that MPC minute indicate that the RBI is happy to leave the door open for more rate cuts.

The output gap in the economy warrants more central bank policy action. However, we will get a better picture once the growth numbers for Q1 are out and then guidance from the authorities on where the full-year growth picture would be, said Goel.

“At the moment our house view is that we will take the rates down to 5 percent, probably in two steps. One, 15 basis points and one 25 basis points and we think probably in October and December,” he said.

The RBI has already lowered the gross domestic product (GDP) growth rate for FY20 to 6.9 percent. When asked if they see a further cut, Goel said, "the risk is that growth numbers will be lower than that. The first quarter numbers will give a better picture.

"The lower-end of the range for Q1 is about 5.8 percent and it would be interesting to see if we miss that on the downside and if we do, whether the authorities still stick to the narrative that it will rebound in the following quarter or whether there is actually a deduction in view or the forecast for growth for the year as a whole. However, the risk is certainly that growth misses on the downside given the domestic and global dynamics," said Goel.

Talking about the trajectory of 10-year yields, Goel said: “We still hold the call that over the next six months or so the direction for rates is likely to be lower than the 10-year to be more pushing towards 6 percent rather than 7 percent.”

According to Goel, the RBI would have to do lot of heavy lifting to spur growth.

With regards to rupee levels, he said the outlook on the currency is a lot more muddled because there are too many cross currents. There are multiple factors at play, both global and domestic. The policy dynamic is more for rates to be lower, and therefore, for a weaker currency and on other hand the balance of payment picture, greater efforts by authorities to try and get in more foreign capital is probably positive, said Goel

“The bias and direction of the dollar-rupee to be more 72-74 kind of range rather than 68-71 range but this is more of a 6-9 month view than a short-term view,” he added.
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