RBI likely to cut repo rate by 25bps to 6.00 pct at next review meeting, says ANZ Research

The Reserve Bank of India (RBI) is expected to cut its policy repo rate by 25 basis points to 6.00 percent from 6.25 percent at its next review meeting on August 2. Further rate cuts beyond that will be data dependent, specifically, whether inflation remains on a soft path or not, ANZ Research reported.

The central bank’s response to the recent downside inflation prints was until recently, dismissive. However, in the last review in June, it acknowledged that the deceleration could be durable. The monetary policy committee review minutes also turned distinctly dovish compared with their hawkish tone in April.  

The odds of a soft inflation trajectory are favourable, which will open up the prospects of further rate cuts beyond August. From its July 2016 peak of 6.07 percent y/y, headline CPI inflation collapsed to 2.18 percent in May 2017, a fall of nearly 400 bps in 10 months.

Importantly, since November 2016, CPI inflation has been consistently undershooting the RBI’s March 2018 target of 4 percent. This deceleration has been accompanied by a moderation in household inflation expectations, on the basis of both current and forward expectations.

The OIS curve is already pricing in a 25bps cut in August and it is unlikely that bond yields will come off further in response to an actual cut. Further downside moves in yield, therefore, lie in the tone of the RBI’s policy statement, i.e. whether the dovish bias remains or not.

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