- In line with our expectations, the RBI cut the repo rate by 25 bps to 6.0%
· The Monetary Policy Committee (MPC) voted 4:2 in favour of the 25 bps rate cut
· The stance of the policy was kept unchanged as neutral
· The RBI revised down its projections for both growth and inflation
· In order to ease liquidity pressures, the RBI announced an increase in the FALLCR
The MPC highlighted that “the output gap remains negative and the domestic economy is facing headwinds, especially on the global front. The need is to strengthen domestic growth impulses by spurring private investment which has remained sluggish”. This suggests that there could be more rate cuts in the offing. Current RBI projections on growth and inflation also suggest that there is room for further easing.
However, the MPC is likely to wait for further clarity on monsoon and its impact on food prices, the fiscal math of the new government, and the evolving dynamics in the global crude market before making its next move. Therefore, we expect the RBI to stay on hold in its June meeting. A rate cut in August would hinge on how the above mentioned risks unfold. For the bond market, unless there is a liquidity surplus in the system, yields could continue to edge up (September estimate of 7.75% for the 10-year benchmark yield).