Key highlights and out take on the monetary policy: Angel Broking
Mr. Jyoti Roy (Equity Strategist - DVP, Angel Broking):
"The RBI in it's fourth bimonthly MPC meeting for Fy20 cut the repo rate by 25bps to 5.15%. As a result the reverse repo rate now stands at 4.9% while the MSF now stands at 5.4%. In it's policy statement the RBI more or less maintained their inflation outlook though growth projection for FY19 has been cut to 6.1% from 6.9%. The RBI also maintained it's accommodative stance and highlighted that growth is their utmost priority thus signalling more rate cuts down the line.
However markets didn't seem too pleased with the 25bps rate cut and sold off immediately as participants were probably hoping for a bigger rate cut from the RBI and probably some other additional measures to boost growth. The RBI acknowledged and expressed it's concern over the lack of transmission and highlighted that they would keep the system liquidity in surplus and may also look at other measures to force transmission of rate cuts.
We expect the RBI to cut rates by another 40 to 65bps by the end of the current easing cycle given stable inflation and soft global growth. However we believe that more than rate cuts transmission of rate cuts is more important now given that spread between the Repo rate and the 10 year G sec at ~150bps is too high, especially considering the accommodative stance of the RBI and surplus liquidity in the system.
The reason for such a high spread could be that bond markets are jittery about the fiscal deficit post cut in corporate tax rates. We believe that it is now very important for the Government to go ahead with its asset monetisation plans which will make up for the likely shortfall in tax collections for the year. We also think that if the spreads between the repo and 10 year G Sec do not come down to a more reasonable level then the RBI will step in and start doing OMO's at some point."