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RBI seen reducing rates in March – UOB

Barnabas Gan, Economist at UOB Group, assessed the recent decision by the RBI to leave the monetary conditions unchanged.

Key Quotes

“The Reserve Bank of India (RBI) kept its benchmark rate unchanged at its 6 Feb meeting in a unanimous vote, leaving both the repurchase rate and reverse repurchase rate at 5.15% and 4.90%, respectively. Consequently, the marginal standing facility and the bank rate were left steady at 5.40% as well.”

“Notably, the tone in RBI’s latest Monetary Policy Statement is positive when compared to its previous rhetoric back in December… In the domestic economy, RBI also cited recovery in India’s industrial activity, seen as the output of core industries returned to positive territory in December.”

“RBI was however quick to highlight that India’s economic is “weak and the output gap remains negative”. The statement added that investment activity remains weak, as seen from the contraction in the production and imports of capital goods in November and December. Industrial outlook survey also highlights the possibility of a sustained weak manufacturing demand conditions.”

“RBI cited that “there is policy space available for future action”. We view that while there had been some signs of economic recovery, there is a need to await incoming data to gauge their sustainability. Moreover, economic activity still remains subdued amid uncertainties revolving around the novel coronavirus (2019-nCoV) and its spill-over impact to Asia’s overall growth trajectory. Meanwhile, the elevated CPI is also expected to ease into the year as food prices fall on the back of improved supply conditions. As such, we maintain our call for RBI to cut its benchmark rate by 25 basis points in its upcoming 31 March meeting.”

 

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