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It looks like the rate lowering cycle is unlikely to end with current cut

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By Gopikrishna Shenoy

The Monetary Policy Committee met from February 5 to February 7 and announced its final decision. What was surprising was the announcement, as the MPC decided on the basis of a 4-2 majority, to cut repo rate by 25 bps.

The MPC had enough reasons to cut rates as headline CPI had come down all the way to 2.2 per cent in the latest readings.

With a flexible inflation target of 4 per cent, a 180 basis points of undershoot convinced the MPC that a monetary easing was necessary and, in their own words, the MPC panel believes the output gap has opened up once again after being called as “almost closed” in the previous meeting.

Target inflation too was revised down to 3.2 per cent from 3.4 per cent for the first half and 3.9 per cent for the third quarter of calendar year 2019. The decision for a cut may also be aided by the slowdown likely.

The Reserve Bank emphasised the need to support growth as a mandate and on these lines has mentioned that the projected growth is likely to slow by 10 basis points to 7.4 per cent against a global backdrop.

The stance and language sounded dovish and, in our view, the rate cut cycle is unlikely to end here. We have been reading more on growth slowing in the developed markets and its impact on emerging market for some time now.

The noticeable change in the Federal Reserve’s language in January gives us hope that 2019 could very well be a year of much less rate hikes in the US. A natural reaction to this would be lower US bond yields and weaker dollar and this could help Indian capital markets in the coming months.

The benign inflation outlook of the MPC is after taking into consideration the fiscal projections by the Centre as well as the stickiness of core CPI.

The borrowing programme will start reflecting on bond markets in the first week of April.

Net borrowing is higher by 12 per cent for the fiscal.

While it is comforting to watch the projected headline inflation number of 3.9 per cent at its highest for the current calendar, we will be watchful of monsoon as it unfolds, the general election results and the revenue collections as it comes.

Source: Economic Times