Further easing from the RBI – UOB

Economist Barnabas Gan at UOB Group assessed the recent decision by the RBI to reduce rates amidst the ongoing coronavirus crisis.

Key Quotes

“The Reserve Bank of India (RBI) held an unscheduled monetary policy meeting on 24 – 26 March in view of the exacerbated COVID-19 outbreak. The committee had voted to cut its policy repo rate by 75bps to 4.40% (4 voted for a 75bps cut while 2 preferred a 50bps cut). The reverse repo rate has consequently been cut by 90bps to 4.0%. This marks the biggest reduction in rates since Jan 2009 when the rate was slashed by 100bps.”

“The tone perceived in the Monetary Policy Statement by RBI has turned pessimistic.”

“Given the exacerbation of COVID-19, RBI cited downside risks to its initial real GDP growth outlook of 4.7% for 4Q19/20.”

“On the inflation front, policy-makers cited that actual price inflation has been coming in above projections given the surge in onion prices.”

“Still, accounting for the COVID-19 impact, we had previously downgraded our growth outlook to 4.0% for FY2020-21 with downside risks (from our prior outlook of 4.8%) in the latest quarterly report published 26 March. Inflation is also expected to slow to an average of 3.5% over the same period (as compared to our previous estimate of 4.4%). Given the strong response by RBI…, we think that the policy space is increasingly limited, and further rate cuts must be accompanied by a material downgrade in both growth and inflation outlook in the year ahead.”