India’s central bank gets further 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.

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.

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.