Monetary Policy: Here's what leading brokerages, analysts expect from RBI

The central bank is likely to cut repo rate for the fifth time in a row

The Reserve Bank of India (RBI) is expected to cut repo rate for the fifth consecutive time in its fourth bi-monthly monetary policy meeting of the financial year 2019-20 (FY20) that concludes on Friday. 

The central bank has already slashed the repo rate four times consecutively this year amounting to 110 basis points in aggregate. The upcoming monetary policy committee (MPC) meeting comes in the backdrop of the RBI's mandate to banks to link their loan products to an external benchmark, like repo rate, for faster transmission of reduction in policy rates to borrowers, from October 1.

While rate cut is almost certain, the quantum of cut and the policy stance will be keenly watched by the market participants. 

Here's a look at what leading brokerages, analysts or market experts expect from the policy meet: 

BoFA-ML

We continue to expect the RBI MPC to follow RBI Governor Shaktikanta Das into another ‘out-of-the-box’ 35bps (basis points) repo rate cut on October 4. This should send a strong signal for bank lending rate cuts with the ‘busy’ industrial season round the corner. With the 2018 liquidity crunch still hurting growth, our India Activity Indicator points to continued slowdown. Second, the inflation outlook remains benign, with September inflation tracking a still reasonable 3.8 per cent, despite an onion price spike. Third, an RBI rate cut will immediately reduce lending rates on retail/SME loans that are now linked to external benchmarks like the RBI repo rate. Fourth, an RBI rate cut should help to meet the immediate challenge of funding Rs 1.45 trillion (0.7 per cent of GDP) corporate tax rate cut, without stoking yields.

Nomura

At the margin, fiscal activism could be seen as reducing the burden on monetary policy to lift growth. However, given the limited growth and inflation impact of corporate tax cuts in the near term, we do not expect the monetary policy path to materially differ. In line with this assumption, we expect the RBI to reduce the policy repo rate by more than 25bp (we forecast up to 40bp repo rate cut to 5%), owing to a sharp reduction of growth forecasts, CPI inflation within the 4% target, and to give a push to credit demand ahead of the festive season (given banks have linked their lending rates to policy repo rates).

Edelweiss Securities

We expect the RBI to cut the policy rate by 35–40 bps at its forthcoming meeting and another 35–40 bps in the rest of FY20 (i.e. further easing of at least 75bps). And the same must be accompanied with sustained surplus in systemic liquidity.

The monetary policy expectation is not just limited to rate cuts. What’s perhaps more important at this stage is to ensure their quick transmission. While aggregate liquidity conditions have improved, transmission remains slow. The RBI’s assessment of the same will be critical. Apart from this, we would watch out for the central bank’s assessment of the NBFC situation and any regulatory developments thereof.

Kotak Institutional Equities

The MPC will be going into the meeting with 1QFY20 GDP growth at 5 per cent against an estimate of 5.8-6.6 per cent in 1HFY20 and 6.9 per cent for FY2020 and having unequivocally expressed growth as its primary concern. With inflation remaining within its comfort range, despite recent onion price increases, revisions to its growth forecast warrant a sharper-than-usual rate cut in the October policy. We pencil in a 40 bps of rate cut which should be a signal to the market that the MPC is not quite done as it front loads the remaining couple of rate cuts in the cycle. Further, with the start of the external benchmarked loans in October, a larger rate cut will help in quicker transmission of rate cuts even as the non-benchmarked loans continue to factor in the past rate cuts.