MUMBAI : The Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) will cut the key policy rate by 25 basis points (bps) as inflation cooled and economic growth slowed to a five-year low, according to economists and bankers surveyed by Mint.

Seven of the 10 economists and bankers polled expect the RBI to cut the repo rate by 25bps, one expects a rate cut of more than 25bps and the rest say RBI will pause this time.

Half of the participants surveyed said that the central bank will stick to its neutral stance in the upcoming policy. One of them said he expects RBI to either change it to accommodative or do away with the practice of declaring a stance.

If there is a rate cut this time, the stance should move to accommodative since a neutral stance is not in line with three consecutive rate cuts, said Soumya Kanti Ghosh, chief economic adviser at State Bank of India (SBI).

However, Ghosh said RBI might as well do away with the practice of spelling out a stance. “I am not sure if the stance will be retained in the policy because it is creating a lot of problems for markets to decipher. Instead, I think, that the language might be tweaked to a more dovish one but the stance segment might not be retained," said Ghosh.

RBI cut its repo rate by 25bps each in the last two bimonthly policies of February and April. In the last monetary policy on 4 April, RBI governor Shaktikanta Das said that with several uncertainties facing the economy, it is appropriate to maintain the neutral stance of monetary policy. “With the inflation outlook looking benign and headline inflation expected to remain below target in the current year, it becomes necessary to address the challenges to the sustained growth of the Indian economy," Das had said.

Participants also said that the slowdown in the economy and in consumption should prod RBI to lower rates in June.

Ashutosh Khajuria, chief financial officer at Federal Bank, said, “The economy is slowing down, consumption growth is falling and a rate cut could boost growth and make loans cheaper."

Khajuria, who headed the bank’s treasury team for many years, added that the central bank’s stance will continue to be neutral as there are inflation risks from a possible monsoon deficit and from uncertainty in crude oil prices as well.

Gross domestic product (GDP) data, released by the government on 31 May, showed growth in the fiscal fourth quarter of FY19 slowing to 5.8%. The National Statistical Office (NSO) also slashed full-year economic growth for 2018-19 to 6.8% from the 7% estimated earlier.

Meanwhile, Bank of America Merrill Lynch (BofAML) said in a report that it is confident that the RBI MPC will cut rates by 25bps on 6 June, with April inflation, at 2.9%, well within its 2-6% mandate. “If rains are normal, the RBI MPC should cut in August too," the report said, adding that it expects the RBI to continue to inject $2-3 billion a month and the money market should slip to surplus repo mode in end-May as cash demand abates after the elections and summer rabi harvest.

Some also believe that global factors like the declining trend in US interest rates could weigh in on the policy decision of the MPC, coupled with a benign inflation print. “More than local, there would be weighing in of the global factors. US interest rates are collapsing and that I think will be a big plus. Secondly, inflation is behaving well below 4% and therefore providing room for a rate cut," said Harihar Krishnamoorthy, head of treasury operations at FirstRand Bank.

On the problems emanating from the liquidity crunch, Krishnamoorthy said, liquidity was strained for the last few months but after the elections results the government spending seems to have resumed and the market overnight liquidity has gone back to flat from the deficit mode.

“Separately, the RBI has announced the first OMO of 15,000 crore after quite some time. So that has put in hopes in the market that they would address the liquidity problem. Earlier, the central bank was talking only of forex swaps and now the market feels that OMOs will make a comeback like last year," added Krishnamoorthy.

However, others also believe that the central bank will factor in the inadequate transmission of policy rates into bank lending rates and keep rates on hold this time. A report by Goldman Sachs said banks have barely transmitted the RBI’s prior policy actions and cited publicly available data till April to suggest that while policy rates have been reduced by 50bps since February, average bank lending rates have declined by only 5bps.

“Banks are not willing to cut rates as deposits and household financial savings are at historical lows. In addition, a predominant fraction of bank deposits are on fixed-rate terms, and are totally unrelated to the policy rate," Goldman Sachs said in its report.


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