By Indranil Sen Gupta & Aastha Gudwani
The standing call for a RBI OMO calendar for June stands. However, the money market will still be in slight deficit/neutral mode, as Governor Shaktikanta Das indicated, rather than surplus/reverse repo that the market seems to be pricing. There, of course, could be spells of reverse repo mode though. Expect RBI to commit a monthly injection of Rs 150-200 billion in the June quarter via RBI OMO and/or FX intervention at end-March or on April 4. Why? Liquidity injected in the ‘slack’ April-September industrial season will avoid a 2018-type credit crunch in the ‘busy’ October-March season. It takes about 6 months for Rs 1 of RBI liquidity to ‘multiply’ into Rs 5.1 of credit. Secondly, this, along with RBI rate cuts, will contain yields to create room for lending rate cuts. Finally, an assurance of sufficient liquidity will catalyse lending rate cuts. Governor Das’s decision to announce a RBI OMO calendar for the March quarter has already defused the liquidity crunch. On balance, expect the RBI MPC to cut 25 bps each on April 4 and June/August with March inflation tracking 3%. It could front-load 50 bps if a liquidity calendar, set out end-March, does not set off lending rate cuts.
Swing factors: 3-year FX swap auction on March 26; Jalan committee report by April 7; any possible relaxation of RBI’s February 12 circular on favourable Supreme Court judgment.
Normal monsoon: Risks are balanced so far with the Australian weather bureau seeing a 50% chance of an El Nino that drives clouds from India. Skymet sees 50% of normal rains in India.
Oil: Unlikely to be inflationary. with estimates forecasting $74/bbl in the June quarter, below June 2018’s $78/bbl.
Edited excerpts from BofaML’s India Economic Watch (March 18)
-Sen Gupta is chief India economist and Gudwani is India economist at BofA Merrill Lync
via Cheaper loans? RBI may effect 25 basis point cuts in April, June/August – The Financial Express