RBI Likely To Cut Repo Rate By 25 Basis Points, Says Goldman Sachs
Goldman Sachs expects inflation to remain below the RBIs medium term target until the end of 2019.
The Reserve Bank of India is likely to cut repo rate by 25 basis points in its April policy meeting due to weak economic activity, benign inflation and soft global growth, a report says.
“We now think a 25 basis points cut is likely in the April meeting. Our thinking is driven by three factors—continued weakness in economic activity, still benign inflation and soft global growth, and a dovish Fed,” Goldman Sachs said in a report.
The monetary policy committee is scheduled to meet from April 2-4.
Goldman Sachs expects inflation to remain below the RBIs medium term target until the end of 2019.
The brokerage expects some pick-up in growth over the course of this year, and forecast real GDP growth to increase from 7.1 percent in financial year 2019 to 7.5 percent in financial year 2020.
Headline consumer price index inflation rose to 2.6 percent in February, reversing a declining trend since July 2018.
The report lowered its inflation forecasts and now sees average headline CPI inflation at 3.4 percent in 2018-19 compared to 3.6 percent before.
It expects some pick-up in food inflation over the course of the year as favourable base effects begin to wane and momentum builds as indicated by the recent prints on consumer and wholesale prices.
“Based on our outlook for food, partly offset by lower commodity prices, and a stable core, we forecast average headline inflation to rise from 3.4 percent in FY19 to 4 percent in FY20,” it said.
The brokerage had earlier expected no change in the policy rate in the April meeting.
It, however, said that a decision to hold rates steady at the April meeting remains a significant possibility.
“Should policymakers continue to be in a wait and watch mode to gauge the progress on transmission of the past rate cut in February, they may choose to loosen later rather than sooner,” the report said.
The brokerage expects another 25 bps rate cut by the RBI in the third quarter of 2019.
“Going forward, in 2020, as growth accelerates, headline inflation begins to pick up, and Fed begins to increase rates, we expect pressure to build on the RBI to shift back to a tightening mode,” it said.
The brokerage said RBI may increase rates next year—one hike of 25 bps each in the first and second quarter of 2020. It, however, does not expect the RBI to increase rates in the fourth quarter of 2019.