RBI could reduce rates further in December – UOB

Economist at UOB Group Barnabas Gan assessed the recent decision by the Reserve Bank of India (RBI) to hold the policy rate unchanged at 4.0%.

Key Quotes

“The Reserve Bank of India (RBI) kept its policy repo rate unchanged at 4.0%, in line with market estimates… This is the second time RBI has kept its rates unchanged, following a 40bps cut in an unscheduled meeting on 22 May 2020.”

“The decision to hold its benchmark rate unchanged was made under a newly constituted monetary policy committee (MPC). It includes three external members who reportedly supported monetary and fiscal stimulus to boost economic growth. Specifically, the newly minted committee kept the policy stance “accommodative”, suggesting that more monetary policy loosening may be on the cards.”

“RBI pencils India’s GDP to contract by 9.5% in FY2020/21 with downside risks. This also marks RBI’s first official assessment of the extent of GDP contraction since the COVID-19 infection. Inflation is also expected to ease to 4.0% in 4QFY2020/21, at the higher end of its current inflation target band of 2 – 4%.”

“India has seen a rapid rise in COVID-19 infections, amid sustained growth headwinds and a lacklustre external environment. Furthermore, RBI has also underlined that more policy accommodation can be expected to mitigate the economic slowdown. As such, we pencil a 25 basis points of rate cut at RBI’s last MPC meeting for 2020 on 4 December 2020.”