RBI likely to lower policy rate again on Friday as India struggles to get growth back on track, says Scotiabank

The Reserve Bank of India (RBI) is expected to lower its policy rate again on Friday afternoon, as India is struggling to get growth back on track after a credit crunch stemming from the nation’s shadow banking system, according to the latest research report from Scotiabank.

The latest data showed that India’s commercial bank lending growth dropped to around 10% only in August. While the market has fully priced in a 25 bp rate cut within a month, we reckon the Indian central bank is more likely to deliver a 35 or 40 bp rate reduction the day after tomorrow.

On September 19, RBI Governor Shaktikanta Das said that there’s room for interest rate cuts to spur economic growth given stable and below-target inflation.

Moreover, the RBI on September 26 released its new liquidity management framework with the call money rate to remain the target rate, signaling an easier liquidity stance should financial conditions warrant.

In addition, the Indian government has stepped up efforts to spur economic growth:

• On September 20, India announced that it will cut the headline corporate tax from 30 percent to 22 percent with effect from April 1, 2019, providing a INR1.45 trillion (USD 20.4 billion) boost to the economy.
• On September 14, finance minister Nirmala Sitharaman unveiled a third set of government decisions to revive the economy, including a INR500 billion export incentive scheme and a INR 100bn special window to provide last mile funding for unfinished housing projects.
• On August 30, finance minister Nirmala Sitharaman announced a merger of 10 public sector banks (PSBs) into four entities and a INR 500bn recapitalization package. On August 23, Finance Minister Nirmala Sitharaman announced a series of measures to boost the slowing economy, including rollback of enhanced super-rich tax on foreign and domestic equity investors, exemption of startups from "angel tax," a package to address distress in the auto sector and an upfront infusion of INR700 billion to public sector banks.

The abovementioned stimulus measures are expected to prompt foreign investors to turn net buyers of Indian equities and bonds again should external uncertainties stay under control and fade away. The Modi administration said on Monday that it will stick to the target of selling INR2.68 trillion of debt in the six months starting October 1, which could alleviate market concerns over fiscal slippage and prop up local bonds, the report added.

Last Friday, Reuters reported that India is looking to ease foreign investment limits in government bonds in order to get its securities included in global bond indexes in the next two years, citing a government source.

"We believe the Fed remains on track to deliver more monetary easing measures that would undermine the dollar in the medium term. The pace of hiring has slowed in the US economy, which will finally erode the power of US household consumption and drag down the economic growth," Scotiabank further commented in the report.