Morgan Stanley expects RBI to inject more liquidity, go for 2nd rate cut in April

New Delhi, Feb 7 (IANS) Morgan Stanley on Friday said that it expects the RBI to take some additional liquidity measures before end-March and another cut of 25 basis points cut in the repo rate in April after the central bank reduced the policy rate by 25 basis points to 6.25 per cent while it retained the stance at neutral earlier in the day. 

In a unanimous vote, the MPC embarked on a rate easing cycle, with a 25 bps rate cut, "in line with our and consensus expectations". In addition, the MPC retained the stance at neutral, as they "remain unambiguously focussed on a durable alignment of inflation with the target, while supporting growth," reflecting on the current domestic growth-inflation dynamics, the Morgan Stanley report states.

These growth-inflation dynamics open up policy space for the MPC to support growth, while remaining focussed on aligning inflation with the target.

While the policy today did not announce any additional liquidity-enhancing measures, the Governor's statement alluded to providing "sufficient" liquidity and taking "proactive" measures to support liquidity, the report said.

The rate easing was in line with expectations, against the backdrop of a weaker-than-anticipated trend in domestic growth and moderating inflation. Further, the RBI has used its levers to add liquidity (Rs1.5 lakh crore) while also indicating a softer approach towards some impending regulations.

"We believe that the RBI is supporting growth through easing rates, softer regulation (deferring new guidelines) and providing sufficient liquidity (expect additional steps). We expect another rate cut of 25bps in the April policy review, which may likely be the last cut," the report states.

It further states that the RBI is expected to proactively manage liquidity and take up some additional measures (OMO purchases/FX swaps) as the liquidity deficit rises towards end-March. "We see risk of a longer rate cut cycle, if growth recovery is lacklustre, driven by weaker domestic demand and uncertainty from global factors," the report said.

To support its point, the report referred to the RBI Governor's statement highlighting that on the regulatory front, there is a trade-off between stability and efficiency which should be kept in mind. He said that this trade-off will be kept in mind while formulating regulations.