India’s central bank gets further ahead of the easing curve
The Reserve Bank of India cut its policy rate by another 25 basis points today. With the prevailing accommodative stance, one more rate cut looks more likely than not at the December meeting
| 5.15% |
RBI repurchase rateAfter 25 basis point cut today |
| As expected | |
Getting ahead of the easing curve
In line with the solid consensus, the Reserve Bank of India (RBI) delivered yet another 25bp policy rate cut at its bi-monthly policy review concluded today. It was also a unanimous decision by all six Monetary Policy Committee (MPC) members, while one of them wanted an even deeper cut of 40bp.
Today’s move takes the RBI's repurchase rate to 5.15% and the reverse repurchase rate to 4.90%, putting the central bank further ahead of Asian and most global peers in the current easing cycle, with a cumulative 135bp rate cut year-to-date.
What the policymakers say
The policy statement noted no change to the ‘accommodative’ stance. And supporting this position, there was a further downgrade of the RBI’s economic outlook for the current fiscal year, with growth now projected at 6.1% against the 6.9% projection at the August meeting (which itself was cut from 7.0%). Here, hopes have been pinned on the monetary policy easing so far this year gradually feeding into the real economy and boosting demand.
Meanwhile, the central bank sees inflation continuing under the 4% target (mid-point of 2-6% target zone), though it did nudge up the expectation for the July-September quarter from 3.1% to 3.4%. It pointed to subdued food price pressure and weak demand conditions, but also admitted “upside risk to the inflation outlook” from crude oil prices amid geopolitical uncertainties.
Are we at the end of it yet?
The continued ‘accommodative’ policy bias, downgrade of growth forecast, and stable inflation expectations – all point to more RBI easing ahead. The question is: how much more?
We think they have done enough easing and, given a considerable policy transmission lag, which the RBI policymakers acknowledge too, they should now pause and allow the rate cuts so far to work their way through the real economy before taking any further action. Otherwise, they run the risk of aggressive stimulus, via both monetary and fiscal channels, eventually transmitting into higher inflation.
Monetary transmission has remained staggered and incomplete. - RBI statement.
However, judging by the all-dovish rhetoric, with some MPC members even calling for a rate cut in excess of 25bp, we don’t think we are at the end of it. Reluctantly though, we retain our view of one more 25bp rate cut at the next meeting in December.
What this means for the markets
As well-flagged by Governor Shaktikanta Das and unanimously anticipated by economists, today's RBI policy adjustment should have little-to-no market impact.
Yet, there is no end in sight to the unfriendly policy backdrop for the Indian rupee (INR) as at least one more 25bp rate cut looks more certain than not at the next RBI meeting in December. We maintain our end-2019 USD/INR forecast at 73.50. Government bonds have been under selling pressure from a worsening fiscal deficit. Lower interest rates should be some relief to that market, though it's unlikely to be a lasting one.
And, after a knee-jerk positive reaction to corporate tax cuts late last month, investors in stocks seem to have retrained their focus back on weak growth prospects ahead, both globally and domestically. We don't see RBI easing as a positive here, and indeed, this was evident today with the Sensex down 300 points as of this writing.
Download
Download article
7 October 2019
Good MornING Asia - 7 October 2019 This bundle contains 4 articles"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).