Home >Industry >Banking >Monetary policy panel may slash key policy rate by 25 basis points

MUMBAI : The Reserve Bank of India (RBI) is likely to cut its key policy rate by a quarter percentage point on Wednesday as tepid consumption and investment growth continue to hurt economic expansion, a survey showed.

RBI’s monetary policy committee will lower the repo rate by 25 basis points (bps), according to the survey of 10 economists and company treasurers by Mint.

The central bank’s monetary policy commentary will be more dovish in nature as it sticks to its accommodative stance, they said.

RBI is likely to go for one more rate cut after August, in October or December, for a total of 50 bps reduction in the rest of 2019, according to Harihar Krishnamoorthy, head of treasury operations at FirstRand Bank.

“I think they will sound visibly dovish. The liquidity surplus is already at 1.5-2 trillion and RBI might as well say it has pumped in enough liquidity and will continue to do as much as needed," said Krishnamoorthy.

RBI has reduced its repo rate by 25 bps each in the last three bi-monthly policies of February, April and June. The cuts have all come after Shaktikanta Das was appointed as governor in December.

Das had said in the meeting of the monetary policy committee in June that growth impulses have clearly weakened, while the headline inflation trajectory is projected to remain below 4% throughout FY20 even after considering the expected transmission of the past two policy rate cuts.

“Keeping in view the evolving growth-inflation dynamics, there is a need for decisive monetary policy action," Das had said in June.

Sonal Verma, chief India economist at Nomura, said that recent comments by Das suggest that he views the accommodative stance as equivalent to an implicit additional 25 bps of easing, and that the future policy trajectory is likely to be data dependent.

“With tentative signs of growth bottoming out, 100 bps of cumulative rate cuts are likely to be delivered (assuming an August cut) and a shift in banking system liquidity to surplus, we expect unchanged policy rates after August’s probable cut, as we believe RBI will want to allow time for the existing policy easing to be transmitted into the system," said Verma.

Inflation as measured by the consumer price index (CPI) at 3.18% in June, although higher than 3.05% in May, was below RBI’s medium-term target of 4%.

Meanwhile, Bank of America Merrill Lynch (BofAML) said in a report that a deficient monsoon will stoke agricultural inflation in the second half of 2019, despite the government’s good record of supply-side management, as a 5% swing in agri prices impacts CPI inflation by 250 bps.

“We continue to expect the RBI monetary policy committee to cut 25 bps on 7 August, pause with inflation going up temporarily on base effects/drought and cut 25 bps in February again as inflation abates," it said.

Others believe that the recent announcement by the India Meteorological Department which has recently forecasted a much lower monsoon deficit, makes a 25 bps rate cut almost certain. Madan Sabnavis, chief economist at CARE Ratings, said that although a couple of days back the agency’s view was that there will be a pause this time, a couple of developments have changed its view.

“Given the fact that a few developments have taken place, we believe RBI will cut the repo rate by 25 bps. One development is that the core sector growth has been one of the lowest which shows economic stagnation and the monsoon update that said India would receive normal monsoon this season, lowering the monsoon deficit," said Sabnavis.

Eight infrastructure sectors, which constitute 40.27% of the index of industrial production, grew 0.2% in June.

Ashutosh Khajuria, chief financial officer at Federal Bank, said he expects RBI to take a pause after a 25 bps cut in August.

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