More rate cuts in the pipeline - DBS Group Research

Odds of a rate cut in September rose after the sharply weaker Jul CPI inflation. Although base effects were expected to temper Jul's print, there was also a significant pullback in the sequential pace. Since Aug's policy review, most of the pre-conditions set out by the central bank have been fulfilled. Impact of below normal rains yet far has been largely contained, which along with base effects will keep Aug CPI below 4%. Rainfall progress here on needs to be monitored closely, with Jun-early Sep shortfall at 12% below the long-term average.

Our current estimates suggest that Sep-Dec CPI inflation will average 5%, still below the Jan16 CPI target at 6%. Renewed slowdown in crude prices have also suppressed tradables pressures, while underlying growth momentum and subdued corporate performance require monetary policy to take a growth-supportive stance. WPI inflation has been in red for nine successive months to Jul, also pointing to limited upside risks for inflationary pressures. CPI inflation is likely to average 5% in FY15/16 (vs 5.6% prev estimate). Inflationary expectations will stay tempered amidst soft commodity prices.

Real GDP growth rose 7% YoY in the Jun quarter (1Q FY15/16) vs 7.5% in Jan-Mar. On GVA basis, the economy expanded 7.1% from 6.1% in Jan-Mar. India's growth pace was amongst the fastest in the region. However domestically, the economy lost steam, with private sector performance still lacklustre across the various sector verticals. With the consumption and investment turnaround likely to be slower than anticipated, soft credit growth and pressured corporate/ bank balance sheets, upturn in growth will be more gradual. We revise down our FY15/16 growth estimate to 7.4% (vs 7.6% prev), inching up to 8% in FY16/17 (vs 8.3% prev). Despite higher indirect taxes, real GDP rose at a slower pace that the Gross value-added (GVA) growth gauge in the Jun quarter. Payback on this front, frontloading of fiscal spending and modest pick-up in consumption spending coverage is likely to influence GDP numbers for rest of FY15/16.

Against the backdrop of slower growth and faster-than-expected pullback in inflation, we revise our rate call to include 50bps more rate cuts in FY15/16, first of which is likely this month. The key caveat here is the external environment. Financial markets have been volatile in the past month, with Chinese yuan's devaluation triggering many Asian currencies, including the Indian rupee to depreciate.

Since July, INR has weakened by ~4%/USD but outdone by Malaysian ringgit down -11% and Indonesian rupiah -6%.

Timing of the RBI rate cuts will be influenced by the US Fed rate decision and China-linked volatility. Assuming stable market conditions in the run-up to the Sep review and fading US hike risks, the RBI is on course to lower rates on 29 Sept. In the event that the US hikes are delayed to next year, RBI's next 25bp cut could be frontloaded to the Dec meeting. In a remote chance that the US raises rates in Sept, we reckon that the RBI will sit on its hands for the time being to allow markets to stabilise and price in further rate increases, before pushing domestic rates lower.

Source : Equity Bulls

Keywords