Expect accommodative monetary policy

The Finance Minister plans to announce two more tranches of economic growth support measures over the next fortnight, along with accommodative monetary policy, said DBS Group Research in its report on 26 August 2019.

Taking a leaf of these recent measures, we reckon that the focus will be on finetuning measures along with an accommodative monetary policy, while steering clear of broad-based fiscal stimulus, writes Radhika Rao in the report following the 23 August 2019 measures announced in Delhi.

The latter, nonetheless, could come into play if growth risks turn starker in second half of the year and into 2020.

While these measures will help improve sentiments and buoy economic activity, we continue to see 30-40bps downside risks to our full-year growth forecast.

2Q19 GDP due this week (26 Aug 2019) will mark a slowdown from March quarter’s 5.8% Year-on-Year, as consumption contracted, weak private and public investments (due to elections) and sub-par services sector.

Third quarter growth is also likely to stay weak but stabilise as government spending resumes after the elections.

An accommodative monetary policy stance accompanied by a jumpstart in the transmission process is also expected to lower lending rates. Despite a better 3Q, evolving trends lend downside risk to our forecast.

For monetary policy, limited fiscal implications from the latest fiscal measures keep the door open for further easing.

The latest RBI minutes from the August review saw the committee members accord high priority to limit weakness to growth and to jumpstart transmission.

We retain our call for another 15-25bp cut at the October meeting, on the back of a weak 2Q GDP outcome later this week.

Challenging global conditions and a dovish FOMC might also add to the case for the RBI to take a growth supportive stance, though admittedly it will be a close call.

Further easing will need to be balanced with preserving policy space after frontloading rate cuts this year.

Relief gains are likely in bond and equity markets on positive domestics but gains in the latter will be restrained by an escalation in the trade war rhetoric.

Absence of an aggressive stimulus program, while the central bank remains focused on policy transmission, will restrain a sharper rise in yields. Global yields also look set to remain low for longer.

USD-INR, meanwhile, continues to watch CNY movements and broader dollar bias, which at this juncture points towards further INR weakness owing to a weak global environment. fiinews.com