The RBI lowered interest rates and as expected shifted its stance to "neutral" from "calibrated tightening" in order to support the slowing economy with a low inflation by cutting the repo rate by 25 basis points (bps) to 6.25%, a decision we view positively in view of the current economic circumstances. It also complements the Centre’s interim Budget, which, among others. announced cash transfer for farmers and provided income-tax relief for small tax payers.

We now foresee a shallow rate-cut cycle ahead. Hence, there is more room for another rate cut by 25bps in April, before rates stabilize. However, we need to observe on the rate cut transmission on banks’ lending rates. It can become incomplete and delayed due to the slow incremental build-up in their deposits. This can pose a challenging for banks to push credit growth without fast-pacing their deposit base, which may require hiking the deposit rates. This could be difficult in a rate-cut cycle.

• The Reserve Bank of India (RBI) lowered interest rates and as expected shifted its stance to "neutral" from "calibrated tightening" in order to support the slowing economy with a low inflation. The RBI during its Monetary Policy Committee (MPC) meeting cut the repo rate by 25 basis points (bps) to 6.25%, a decision we view positively in view of the current economic circumstances. RBI’s last rate cut was to 6.00% in August 2017.

• Decision to cut the repo rate is a move to strengthen private investment and support private consumption. Although investment activity is seen to be recovering, it was mainly supported by public spending on infrastructure. The decision to cut rate complements the Centre’s interim Budget, which, among others. announced cash transfer for farmers and provided income-tax relief for small tax payers.

• Economic growth fell to a worse-than-expected 7.1% in 3Q2018 from 8.2% in 2Q2018 dragged down by slower consumer spending and farm growth. Outlook on inflation is benign. Headline inflation is expected to remain contained below or at its target of 4% has opened the door for policy action. The MPC revised the CPI inflation to 2.8% in 4Q of 2018-19, 3.2%-3.4% in 1H2019-20 and 3.9% in 3Q2019-20.

• We now foresee a shallow rate-cut cycle ahead. Hence, there is more room for another rate cut by 25bps in April, before rates stabilize. However, we need to observe on the rate cut transmission on banks’ lending rates. It can become incomplete and delayed due to the slow incremental build-up in their deposits. This can pose a challenging for banks to push credit growth without fast-pacing their deposit base, which may require hiking the deposit rates. This could be difficult in a rate-cut cycle.

Source: AmInvest Research - 8 Feb 2019