The Reserve Bank of India (RBI) continues to forecast inflation trajectory at sub 4% levels over the next four quarters until Q1FY21. This is second time in a row that the entire Monetary Policy Committee (MPC) unanimously voted for a rate cut in the backdrop of unequivocal focus on growth. Consensus decision on retaining the ‘accommodative’ policy stance will keep hopes of incremental rate cuts alive.

The departure from taking conventional steps towards changes in the benchmark policy rate potentially opens the door for a future encore.

Since the inception of the MPC in October, 2016, the voting pattern suggests the highest degree of policy dovishness underscoring the possibility of incremental easing as addressing growth concerns by boosting aggregate demand, especially private investment, assumes the highest priority at this juncture while remaining consistent with the inflation mandate.

The larger and unconventional dose of repo rate cut in August policy review likely stems from continued downward revision in FY20 GDP growth estimates for the third time in a row to 6.9% currently, from 7.4%, introduced during February 2019 policy review. More importantly, since the RBI ascribes downside risks, the possibility of further downward revision to its FY20 growth estimate appears likely.

Comfort on the fiscal deficit displayed by government’s intent to stick to the path of fiscal consolidation also adds to the rate cut.
Most of the systemically important central banks have turned dovish, with the US Federal Reserve leading the pack with ‘insurance’ rate cut in July 2019. Within emerging markets, Brazil and Turkey opted for 50 basis points (bps) and 425 bps of cuts in July 2019. On the developed markets front, the Reserve Bank of New Zealand surprised on Wednesday by announcing a 50 bps rate cut vis-à-vis consensus expectation of a 25 bps cut.

We expect near-term growth momentum to remain lacklustre with FY20 GDP growth estimate at 6.7%. With inflation projected to remain benign at 3.5% for FY20, more importantly, undershoot the 4% target for third year in a row, we continue to expect the MPC to opt for incremental monetary accommodation. We now project another 25-40 bps scope for rate cuts in the next one or two policy reviews. This could potentially take the repo rate towards 5.00%, the lowest since the level of 4.75% seen during the immediate aftermath of the global financial crisis.

(The author is chief economist, Yes Bank)