The Reserve Bank of India cut its key interest rate today by 25 basis points to 5.75 percent, in line with market expectations. The members of the committee voted unanimously to lower the policy repo rate. Moreover, the central bank downwardly revised its economic growth projection for fiscal 2020 to 7 percent from 7.2 percent and maintained the benign trajectory for inflation to 3 percent – 3.1 percent in the first half of the fiscal year and 3.4 percent – 3.7 percent in the second half of fiscal 2020. The previous inflation forecasts for the first and second half of the fiscal year were 2.9 percent – 3 percent and 3.5 percent – 3.8 percent, respectively. Food inflation is expected to rise, but weak soft core pressures, arising mainly from weak demand, will likely counter it.
The Monetary Policy Committee noted that the conditions for demand had subdued considerably, which was seen in the widening of the output gap. It noted that the deceleration in investment and consumption growth was a ‘matter of concern’.
The Reserve Bank of India has proposed the formation of a new internal working group that will look into the liquidity framework in the economy with recommendations to be submitted by mid-July. Moreover, the RBI Governor mentioned that the central bank will guarantee adequate systemic liquidity which is now into ‘surplus’ mode. According to an ANZ research report, this view endorses the RBI’s preference for surplus liquidity.
“While today’s rate cut was broadly expected, the overly dovish undertone of the central bank underlines our expectations that there is room for an extension in the easing cycle. Even after today’s cut, given the close to 3 percent inflation currently, the real rate is still 75bps higher than the 2 percent mark. While inflation will likely inch up gradually, there is room for further cuts in our view. We therefore revise our policy rate trajectory to include three more rate cuts of 25bps in the next six months”, stated ANZ.
