RBI’s Status Quo Leaves Brokerages Divided On Future Rate Cuts

The Reserve Bank of India continuing to maintain status quo on interest rates in its monetary policy review on Wednesday has left brokerages divided on future rate cuts for the remainder of the year.

While Credit Suisse and Edelweiss expect RBI to implement a 25-basis-point cut in financial year 2017-18, Kotak Institutional Equities and IDFC expect the central bank to pause for the rest of the year. Citi is also “less confident” of a 25-basis-point cut in the policy rate.

On inflation, exact forecasts differed among brokerages, but they do expect inflation to inch higher than 4 percent.

Here's what the brokerages had to say about the RBI's monitory policy review:

Credit Suisse

• Reduction in statutory liquidity ratio should provide banks more leeway to manage liquidity as the overall banking system moves to neutral
• Broadly agrees with RBI's growth assessment which is: growth slowdown in April-June is transient led by the short-term supply side; growth to accelerate in the second half as GST-led disruptions will get resolved soon; consumption will get a boost from states' pay commission.
• Sees downside risks to RBI's growth estimate of 6.7 percent versus our estimate of 6.4 percent hence, expect the RBI to cut rates by 25 basis points in the rest of the financial year.
• Upside risks to inflation from fiscal slippage: expenditure on farm loan waivers and states' pay commission
• Expect CPI to rise for the rest of the year on the back of: expected reversal of low food inflation, GST hike on cars and the Central Pay Commission recommendation of 138 percent hike in the housing allowance
• Pay commission's impact on inflation to be around 50 to 70 basis points
• Two comforting factors on inflation: expect RBI to look through pay commission's statistical impact, expect effective supply management by the government for reversal of commodity prices and to keep food prices benign

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Edelweiss Securities

• Monitory Policy Committee's decision in line with Edelweiss' expectation
• Possibility of another rate cut is high as Edelweiss expects inflation to be around 4 percent
• Main risk from sustained and secular strength in the U.S. dollar
• Slow growth but “largely stable” inflation forecast opens room for another rate cut
• Expects another 25 basis points cut in the current financial year

Kotak Institutional Equities

• Expects headline inflation towards 4.7 percent by end of March 2018, in line with RBI's estimates
• Reasons: adverse base effect, seventh central pay commission HRA implementation, pending GST changes, inflation from rupee depreciation, mean reversion of food prices, higher commodity prices and global financial tightening
• Excise duty cut in petrol and diesel is expected to lower CPI inflation by nearly 8 basis points
• RBI will pause for the rest of FY18

IDFC

• Positive signs for growth because of steady PMI and robust auto sales
• IDFC's estimates of GDP indicate a pickup in the remaining quarters to a range of 6.8-7.0 percent from 5.7 percent in Q1FY18
• Recent cut in the excise on petrol and diesel is expected to release Rs 13,000 crore as disposable income and could provide some boost to consumption
• Headline CPI inflation to be in the range of 4.3-4.4 percent by March 2018 with core CPI averaging in the region of 5 percent in the second half of the current fiscal
• These reasons along with easier fiscal stance (inflationary in the medium term), the bar for RBI to provide further accommodation is high
• Expect RBI to stay on a pause with interest rates in FY18

Citi

• RBI's GVA forecast of 6.7 percent for the current fiscal is in line with their expectation
• Citi sees four pre-conditions that need to be catered to before a rate cut: 1) a firm growth slowdown which forces the RBI to think that the cyclical component of growth is stronger than the transient impact 2) inflation outcomes lower than their model forecasts 3) fiscal slippage within tolerable limits (which should be 0.5 percent of GDP according to CITI), and 4) global uncertainties contained
• Less confident of an earlier call for a 25 basis points cut in policy rate in Q4FY18 as the MPC stays fixed to its inflation mandate
• Meeting all these pre-conditions may be difficult but actual CPI can undershoot RBI projection, opening space for another rate cut
• Markets should be reluctant to price in further policy rate cuts after RBI left upside inflation risks
• Lack of foreign portfolio investment debt limits could hurt the rupee
• Continue to be bearish on the rupee as dollar trends are uncertain as well
• 50 basis points in SLR is unlikely to hurt banks imeediately as demand for credit is constrained

JP Morgan

• MPC's decision was in-line with JP Morgan's expectations
• Simultaneous growth markdown and inflation mark-up is consistent with an adverse supply shock
• RBI's current GVA forecast of 6.7 percent in line with JP Morgan's forcast of 6.8 percent
• The markdown was large but not a surprise
• Given growing risks of impending fiscal slippage, inflation undershooting RBI's forecast, if any, would need to be meaningful to trigger more easin