Dovish view with inclination towards further rate cuts going forward.
- Policy repo rate reduced by 25 bps to 5.15%, reverse repo at 4.90% and MSF at 5.40%
- Monetary Policy stance remains “Accommodative – As long as it is necessary to revive growth, while ensuring that inflation remains within target”.
- CPI inflation projected at 3.4% for Q2:FY20 and 3.5-3.7% for H2:FY20, with risks evenly balanced.
- GDP growth forecast reduced to 6.1% from 6.9% in FY 19-20, and in the range of 6.6-7.2% for H2:2019-20 with risks evenly balanced.
- Liquidity to be Neutral-Positive.
Retail inflation remained in a narrow range of 3.1-3.2% between June & August, driven by food inflation, even as fuel inflation and CPI inflation excluding food & fuel moderated.
Factors shaping inflation path-
- With above average monsoon, Kharif production is estimated at close to last year’s level, auguring well for the overall food supply situation.
- RBIs forward looking survey point to weak demand conditions, with indications of softening of output prices in Q3:2019-20.
- Geo-political uncertainties affecting oil prices may provide upside risks to the inflation outlook.
- Three months and one year ahead inflation expectations of households polled by the Reserve Bank have risen
- Currency depreciations in several emerging economies.
- Liquidity in the system was in surplus in August-September 2019 despite expansion of currency in circulation and forex operations by the RBI draining liquidity from the system.
- Reflecting easy liquidity conditions, the weighted average call rate (WACR) traded below the policy repo rate (on an average) by 8 bps in August and by 6 bps in September.
Current Account Deficit and Forex
- Trade deficit narrowed during July-August 2019. Higher net services receipts and private transfer receipts helped contain the current account deficit to 2% of GDP in Q1:2019-20.
- On the financing side, net foreign direct investment rose to US$ 17.7 billion in April-July 2019 from US$ 11.4 billion a year ago.
- India’s foreign exchange reserves were at US$ 434.6 billion on October 1, 2019 – an increase of US$ 21.7 billion over end-March 2019.
Domestic Growth outlook cut to 6.1%
- Growth in GDP slumped to 5% in Q1:2019-20, extending a sequential deceleration to the 5th consecutive quarter.
- Real GDP growth for 2019-20 is revised downwards from 6.9% in the August policy to 6.1% – in the range of 5.3% in Q2:2019-20 and in the range of 6.6-7.2% for H2:2019-20 with risks evenly balanced.
Factors that will influence growth
- Various high frequency indicators suggest that domestic demand conditions have remained weak.
- The business expectations index of the Reserve Bank’s industrial outlook survey shows muted expansion in demand conditions in Q3.
- Export prospects have been impacted by slowing global growth and continuing trade tensions.
- Impact of monetary policy easing since February 2019 is gradually expected to feed into the real economy and boost demand.
- Several measures announced by the Government over the last two months are expected to revive sentiment and spur domestic demand, especially private consumption.
Assessment of Global Growth
- Global economic activity has slowed down since the meeting of the MPC in August 2019, amidst elevated trade tensions and geo-political uncertainty. The Institute for Supply Management’s index for September indicates that manufacturing slipped further into contraction to touch its lowest reading in a decade
- Economic activity remained weak in major emerging market economies, pulled down mainly by a deteriorating global environment in Q3.
- Crude oil prices were pulled down by softer demand, amidst adequate supplies in early August. Prices remained range bound until mid-September when supply disruptions on account of an escalating geo-political conflict resulted in a spike which has abated faster than expected
- Gold prices remained elevated on safe haven demand.
- Central banks became more accommodative with inflation remaining below targets across major AEs and EMEs
MPC voted 5-1 in favour of cutting Repo rate by 25 bps, while 1 member (Dr. Ravindra Dholakia) voted to reduce the policy repo rate by 40 bps.
Other Key Announcement
- RBI Increase the household income limit for borrowers of NBFC-MFIs from the current level of Rs. 1 lakh for rural areas and INR 1.60 lakh for urban/semi urban areas to INR 1.25 lakh and INR 2.00 lakh, respectively. Raise the lending limit from INR 1.00 lakh to INR 1.25 lakh per eligible borrower.
- Reserve bank have allowed banks to freely offer foreign exchange prices to non-residents at all times, out of their Indian books. Also, rupee derivatives (with settlement in foreign currency) to be traded in International Financial Services Centres.
Debt Market View
- RBI reduced policy rate by 25 basis points from 5.40% to 5.15% and maintained its stance at “Accommodative” in order to strengthen domestic growth impulses by spurring private investment which has remained sluggish.
- Growth is faltering, Inflation is comfortably below the RBIs target, Brent crude prices are in a comfortable zone and Liquidity continues to be in surplus zone.
- Global central banks are increasing moving towards dovish stance.
- With tax forgone because of Corporate tax cut, Fiscal deficit target remains a challenge. Lower GST and Direct tax collections also pose threat in achieving Fiscal target
- High Real-rates continue to make debt an attractive asset class
- We suggest products having maturity close to investment horizon having highest credit quality and lowest expense for investors having less than 1-year time horizon.
- For a 3-year investor, we recommend allocation in 1-5-year average maturity segment with high credit quality portfolios mainly focused on accrual. The high-quality PSU and corporate bond spread over G-Sec is attractive
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