RBI Policy Preview: Repo cut likely; guidance on liquidity easing measures in focus

While it's almost a given that the Reserve Bank of India (RBI) will deliver a policy rate cut when the three-day Monetary Policy Committee meeting ends on April 4, hopes are high that the central bank will also do more to address liquidity concerns.

On March 29, the liquidity deficit widened to a one-month high of Rs 1.13 lakh crore, mostly due to the financial year-end outflows. It is likely to continue to be in deficit owing to the high demand for currency in circulation ahead of the general elections.

In absence of adequate liquidity, a policy rate cut, even at 50 basis points, may not be effective. "Some market participants are anticipating 50 basis points cut as well. But I believe that the RBI should focus only on addressing the liquidity situation in the economy, wherein the real problem lies," said Amar Ambani, President & Head of Research, Yes Securities. Measures including a reduction in the cash reserve ratio may be the need of the hour, he said.

With a new liquidity management tool (swaps) in its kit, markets are uncertain as to how much the RBI will resort to using open market operations (OMOs) in the new financial year.

The central bank has infused liquidity of Rs 2.99 lakh crore via open market purchases of government bonds in the financial year 2018-19. These include Rs 757 crore worth of bonds bought directly. In March, the RBI also unveiled a new tool -- the long-term dollar-rupee swaps. After successfully infusing Rs 35,000 crore worth of liquidity on March 26, the RBI has already announced second such auction of a similar amount on April 23.

"Liquidity in the near term could shift to neutral/surplus as foreign flows remain adequate in 1QFY20. While this would provide some relief, it does not necessarily ensure a complete and smooth monetary policy transmission," Suvodeep Rakshit and Anindya Bhowmik, analysts at Kotak Securities said in a note. They added that a steeper yield curve will likely keep credit costs elevated and will have adverse implications for economic growth.

A poll of about 70 economists conducted by Reuters showed that 85 percent of the participants expect the RBI to cut the repo rate by 25 basis points to 6 percent on April 4 and then keep the rates on hold through to the middle of next year at least.

"We expect the RBI to change its stance from neutral to accommodative in view of the global and domestic growth weakness," said VK Sharma, Head PCG & Capital Markets Strategy, HDFC Securities.

An accommodative stance will imply that the central bank is open to cutting rates further to support growth.

It also matters that the country's manufacturing industry has slowed to a six-month low in March, according to the Nikkei Manufacturing PMI compiled by HIS Markit. The index fell to a six-month low of 52.6 in March from February's 54.3 as orders and output expanded at a weaker rate.

In his first monetary policy review after taking over as the Governor late last year, Shaktikanta Das had surprised the markets with a 25 basis points rate cut and changed policy stance from calibrated tightening to neutral in the February meeting.

While a softer inflation outlook supported this move, Das had noted in the policy review that "the monsoon outcome is assumed to be normal; any spatial or temporal variation in rainfall may alter the food inflation outlook."