HSBC Sees India’s Central Bank Cut Rates By Another 75 Basis Points In FY20

HSBC Global Research expects India’s monetary policy committee to cut interest by another 75 basis points over the remainder of this financial year, taking the benchmark repo rate down to 5 percent.

The research house, which earlier expected 50 basis points in rate cuts from here, is penciling in an additional rate cut in light of persistent weakness in the Indian economy.

The repo rate currently stands at 5.75 percent. The next monetary policy review is scheduled for August 7, where a majority of economists are expecting a 25 basis point cut.

Growth Forecast Revised Downward

One of the reasons behind the expectation of steeper rate cuts is continued signs of weakness in growth.

HSBC expects GDP growth in FY20 to settle at 6.4 percent compared to the earlier estimate of 6.8 percent, Bhandari wrote in her note. The revision in forecast is on account of slowing bank credit, low likelihood of a revival in consumption, poor rains and weaker global growth, she explained.

Bank credit, which was exhibiting strong growth until March, has started to slow, the report pointed out. While there have been previous instances of a ‘credit-less’ recovery, such a rebound appears less likely this time due to expected weakness in rural and urban consumption.

The slower credit growth from banks in recent months has meant that the money multiplier, which reflects the ratio of broad money to reserve money, has fallen once again, Bhandari pointed out.

Lack Of Inflation

Meanwhile, inflation remains in check. In fact, there is a distinct lack of inflation visible across many sectors.

HSBC’s diffusion index, which measures the extent of disinflation relative to the average inflation across different categories, shows that a number of ‘core inflation’ categories are seeing inflation levels well below the average.

“Considering the economic environment, inflation is likely to remain well under the four percent target with rising disinflation across sectors,” Bhandari wrote.

While noting that there are “structural overtones” to the current economic slowdown, HSBC recommended recycling public sector assets by disinvestments and selling of government owned assets such as roads and other infrastructure.

Shedding the foreign trade protectionist stance and tackling domestic bottlenecks, instead of levying import duties, could also help India by expanding its export market share, HSBC said.