UBS sees RBI getting into an aggressive easing mode in FY20

Mumbai: With inflation likely to remain under 4 per cent till October, the Reserve Bank may cut rates to the tune of 75-100 basis points in the next financial year, says a report. The forecast also includes the 25 basis points reduction in the February policy.

Headline CPI inflation is likely to remain below 4 per cent until October and averages at 3.8 percent in FY20, a UBS report said on Wednesday. The Swiss brokerage bases its forecast on tepid food inflation for the fifth consecutive year, normal monsoons and stable crude prices.

"Amidst benign inflation, we expect the monetary policy committee to cut the policy rate a cumulative 75-100 basis points in this cycle (including the recent 25 basis points rate cut)," the report said.

In the sixth bi-monthly monetary policy announced on February 7, the RBI reduced the repo rate by 25 basis points to 6.25 per cent and also changed the policy stance to 'neutral' from the earlier 'calibrated tightening', signalling further softening on its approach to rates.

The report said while it expects 75-100 bps policy easing in FY20, the monetary transmission in terms of lower lending and deposit rates will be partial and delayed due to a wide gap between credit and deposit growth. The incremental credit deposit ratio also remains elevated, above 100 percent, it said.

"Going forward, it will be intriguing to see the manner in which the RBI plans to reconcile the emerging trade-off between short-term inflation dynamics with the medium-term objective, since an accommodative policy bias could result in boosting consumption over capex and widened macro stability risks over time," it said.