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Last Updated : Oct 04, 2019 01:38 PM IST | Source:

RBI move on expected lines, more rate cuts likely: Experts

Ananth Narayan, Professor at SPJIMR, said that the rate cut was pretty much on expected lines given fiscal deficit concerns.

Sunil Shankar Matkar

The Monetary Policy Committee of Reserve Bank of India on October 4 expectedly slashed repo rate by 25 bps.

This is the fifth consecutive rate cut by the Monetary Policy Committee.

"With inflation expected to remain below target in the remaining period of 2019-20 and Q1:2020-21, there is policy space to address these growth concerns by reinvigorating domestic demand within the flexible inflation targeting mandate. It is in this context that the MPC decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target," the RBI said in its policy statement.


Largely, RBI's  move was on expected lines but the sharp cut in growth rate (in fact higher-than-expected) was slightly surprising for the market and indicated that there could more rate cuts in coming policy meetings given weak domestic demand conditions accompanied with contained inflation trajectory, experts said.

"With the current tone being dovish; there may be further rates cut. The only negative aspect is the downward revision in GDP for FY20. Post-corporate tax cut, we believe this is in line to boost the demand side issues in the economy," said Mustafa Nadeem, CEO, Epic Research.

The RBI cut its GDP growth forecast for full year (FY20) to 6.1 percent from 6.9 percent earlier, with risks evenly balanced. The central bank also reduced April-June quarter 2021 GDP growth forecast by 0.2 percent to 7.2 percent.

GDP growth for Q1FY20 at 5 percent was significantly lower than projected, the RBI said.

Ananth Narayan, Professor at SPJIMR, told CNBC-TV18 that the rate cut was pretty much on expected lines given fiscal deficit concerns.

"The RBI language is extremely dovish, indicating further rate cut going ahead. On the whole, it was a robust policy from RBI and the correction in equity market could be due to expectations of 40bps rate cut," he said.

Amar Ambani feels there is a possibility of another 15 to 30bps further cut while VK Vijayakumar Chief Investment Strategist at Geojit Financial Services expects the RBI to cut repo rate by 40 bps.

On inflation, RBI continued to see CPI well below 4 percent till Q1 FY21 in the wake of widening negative output gap and benign core price pressure.

The central bank revised its CPI inflation projection slightly upwards to 3.4 percent for second quarter of FY20, but retained projections for second half of FY20 at 3.5-3.7 percent and 3.6 percent for first quarter of FY20, with risks evenly balanced.

The RBI policy also indicated concerns over fiscal slippages due to recent government measures which cost to a revenue loss of Rs 1.45 lakh crore.

Here are more reactions on RBI policy:

Amar Ambani, Head of Research – Institutional Equities, Yes Securities

MPC delivered yet another 25 bps rate cut, bringing the cumulative reduction in interest rate of 135 bps for this calendar year. Concerns on the fiscal side on account of lower GST revenues and corporate tax cuts possibly dissuaded RBI from a steeper rate cut. Nevertheless, accommodative policy action from the central bank is quite expected given the deceleration in frequency indicators and protracted slowdown in private consumption. The need of the hour is to revive the economy.

On growth, GDP projections for FY20 is significantly downgraded to 6.1 percent from the earlier estimate of 6.9 percent, which was quite expected. In terms of future policy action, there is certainly scope for further rate move given the weak domestic demand conditions accompanied with contained inflation trajectory.

We believe there is a possibility of another 15 to 30bps further cut. On the bond markets, while we do not rule out the possibility of yields rising somewhat, but eventually we see them headed lower. Although there is a concern regarding fiscal slippage, we sense that markets have largely baked in the fact that fiscal deficit will widen to 3.7-3.8 percent of GDP. Having said that, we see interest rates falling significantly, looking at high real rates and scope for fall in credit spread as well as term premium. Moreover, policy transmission will eventually take place, which has not been yet materialised optimally. We see 10-year yields in the range of 6.3-6.7 percent.

Mahendra Jajoo- Head-Fixed Income, Mirae Asset Global Investments

MPC cut key policy rates by 25 bps in line with market expectations. RBI largely retained inflation projections for next year and revised downward growth projections. In view of that, further rates cuts may be expected in forthcoming policy reviews. While money market rates eased in response, bond yields inched up slightly as traders remain apprehensive of larger than currently scheduled borrowings by government. Market will now look forward to any possible OMO purchase operations to get comfort on absorption of additional supplies if any. We expect over all bond yields to remain range bound with easing bias.

Joseph Thomas, Head Research - Emkay Wealth Management

RBI has once again proved to be well ahead of the curve in unleashing monetary efficacies to combat the economic slowdown, in perfectly complementing the fiscal initiatives, with the cut of 25 bps- bringing down the repo rate to 5.15 percent.

In conformity with this aggressive approach, RBI is likely to continue with its campaign for more rapid transmission of the benefits to credit users, through lower rates to a large extent linked to the base rate. There may be further cuts in the rate in the light of the GDP growth forecast being lowered form 6.90 percent to 6.10 percent for FY 20. We need to see more action from the government for a consumption-led recovery.

Romesh Tiwari, Head of Research, CapitalAim

The rate cut by 25 bps was expected by the market and is no surprise. I think the market will react indifferently to the statements from RBI about the expectations of the revival of domestic demand due to various measures taken by the government in the last couple of months and the assurance by the governor that the RBI will continue with an accommodative stance on monetary policy as long as needed. The downward revision of GDP for the June quarter of 2020 is not a surprise and the market is already discounting it. The market movement will not be much impacted with these measures.

Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers

Despite the 25 bps rate cut today being at the lower bound of expectations, RBI remains concerned on growth and guided for continued accommodative monetary policy stance. While RBI continues to expect growth revival in the second half of FY20, growth rates have been reduced for both FY20 and Q1FY21. In line with these, RBI maintains an expansionary stance on the liquidity side also. We now expect that rather than 5 percent, the repo rate in this cycle would bottom out at 4.5 percent. RBI's stance coupled with recent government measures bode well for the equity market. We also feel that the likely deeper policy rate cut coupled with focus of the RBI on transmission of policy rate cut in the credit market would result in bond yields softening more than earlier expected.

(Disclaimer: The views and investment tips expressed by investment expert on are his own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions)

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First Published on Oct 4, 2019 01:34 pm
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