The Reserve Bank of India (RBI) easing cycles usually begin with a dovish surprises. But this time may be different. Nomura India believes the RBI is unlikely to overdeliver this time, even as the foreign brokerage still sees a deeper cutting cycle in the medium term.
To recall, the RBI surprised market in 2012 with a bigger than expected rate cut. Later in 2015, it surprised with an inter meeting cut. In 2019 also, it came out with a surprise 25 basis points cut.
This time, in the first MPC meeting chaired by the new Governor Sanjay Malhotra, Nomura expects a unanimous vote by MPC members to cut the policy repo rate by 25 basis points (bps) to 6.25 per cent. They are likely to keep their 'neutral' policy stance, it said.
"While previous RBI easing cycles usually started with a dovish surprise, we feel the RBI is unlikely to overdeliver this time. We have long believed the market was underpricing the monetary cycle, but at the current juncture, things appear more balanced," Nomura said.
The broking firm noted that the consensus expectation is of a 25 bps rate cut and no change to the cash reserve ratio (CRR). While there are still a few market participants, who expect the RBI to hold rates steady; there are also some who expect more from the RBI -- either in the form of a 50bp repo rate cut, a CRR cut, more liquidity measures or a change in stance to ‘accommodative'.
Dovish surprise: 3 ways There are three ways that the RBI can surprise the market. The first is larger than a 25bp rate cut. There are some market participants who expect a 50bp cut from the RBI, as they believe the RBI is behind the curve, given how long it has held off cutting rates.
A second way can be change in policy stance to 'accomodative' from 'neutral'. In the October policy meeting, the RBI moved to a ‘Neutral’ stance. A move to ‘accommodative’ would likely suggest the RBI is open to more cuts and the cycle can be deeper.
The third is a permanent cut to the CRR. The RBI cut the CRR to 4 per cent from 4.5 per cent at the December policy meeting and framed this as an unwinding of the post-Covid hike. Nomura said another 50bp CRR cut would inject Rs 1.1 lakh crore of liquidity into the system, but as this would be taking place very soon after prior measures were announced by the RBI, Nomura said market would be dovishly surprised by this.
What to expect Nomura maintained its base case in which the RBI meets expectations but does not overdeliver. While it believes RBI has become more tolerant of forex depreciation, as its focus has shifted towards supporting growth, the global backdrop remains fluid and, at this juncture, the RBI may err on the side of caution.
"Secondly, RBI forecasts are likely to show that growth is still holding up. Finally, on the liquidity side, while the previously announced measures are unlikely to be sufficient, we expect the RBI to continue with OMOs/buy-sell swaps, rather than another CRR cut," it said.
History decoded
Nomura said there were unique circumstance in each of the previous three instances. "In 2012, this was largely viewed as a policy mistake, and the RBI governor at the time, Subbarao, later admitted that poor inflation data was the cause of this policy mistake. In 2015, while the timing was a surprise, as it occurred just a few days before the scheduled meeting, the cut itself was not," Nomura said.
Finally, in 2019, it was the first meeting of former Governor Das, who implemented a surprise cut in his first meeting, reversing the previous RBI’s hawkish stance.