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RBI MPC Policy : 25bps Cut in Festival is too little

This is 17th MPC meeting since formation , it has seen seven rate cuts and two rate hikes during this period. The repo rate has come down from 6.25% to 5.15% during the same period as the focus of MPC shift from inflation which it is able to control till now to GDP growth.

If we see the dot plot of the committee we find a major difference of opinion that is good, in a sense it does not create uncertainty in trajectory of rates giving the lenders and corporate clear path for picking up activity.

Bond markets is able to price in the MPC decision ahead of the meeting and if seen below in the chart the 10yr Bond yield has moved ahead identically of the decision especially since December 2017 meet.

But in September 2019 due to spree of government announcements and lower income tax collection growth rate there has been a doubt priced in that fiscal deficit will not meet the target that is why there was a small spike in the yields but as per expectations there will be 25-40bps cut.

RBI MPC is now growth focused , if we look at Composite PMI YoY growth rates along with other high frequency data we are able to gauge the trend to a certain extend which is still showing a weak growth trend continuing beyond first quarter.

Our View :

We believe this repo rate 25bps cut will be transmitted more quickly as majority of banks have shifted Rs. 30-40 lakhs loans to repo rate linked products. Currently there are loan melas are also been organised that will help provide instant cheaper product though in these melas approvals are not given on spot. RBI has also mentioned dovish stance as the growth for Sep 2019 quarter to be 5.3% and have downgraded for FY 20.

This is negative as they could have been front loading of rate cut to 50bps that would helped pick up the finance demand leading to clearing of inventories at automotive and consumer durables sectors and too some extend provide some relief to producers.

Negative : PSU Banks & NBFC