The Reserve Bank of India (RBI) is likely to cut benchmark policy rates by 25 basis points (bps) on 4 April, when it announces its first monetary policy for 2019-20, considering that inflation continues to undershoot the central bank’s trajectory and growth continues to taper off led by a global slowdown, according to economists and treasury heads surveyed by Mint.
Nine out of 10 experts polled expected the repo rate, the rate at which RBI lends to banks, to be lowered by 25bps to 6%, with the possibility of one more rate cut before the end of the fiscal year. However, they were divided when asked if the central bank’s monetary policy committee (MPC) will change its policy stance. Half of those polled expected the RBI to change its stance to accommodative from neutral, while the rest expected it to maintain the neutral stance.
“We expect 25bps rate cut on the basis of global and local macros. Inflation will remain low for the next 6 months. Till the base effect doesn’t pick up, we are ok. If global macros continue to surprise on growth, we could have one more rate cut. We expect a total of 50 bps rate cut for this (fiscal) year," said Ashish Vaidya, head of trading, DBS Bank India.
A small section of participants polled also said the stage is ripe for a larger rate cut of 50bps. “If the rate cut is of 25bps only, then the RBI could indicate more cuts through a possible shift in stance or policy statement. The RBI should also take a holistic approach with liquidity framework as call rates are liquidity agnostic," said Soumya Kanti Ghosh, chief economist, State Bank of India.
All the participants concluded that falling growth is of serious concern as employment generation has declined and industrial activity has slowed. India’s Gross Domestic Product (GDP) growth slowed to a five-quarter low of 6.6% in the three months to December and is expected to touch 6.4% in the March quarter.
Bank treasurers and economists were unanimous in their view that the MPC will pare down its forecast to 7-7.25% for 2019-20.
Goldman Sachs, however, expects some pick-up in growth during the year with real GDP growth rising from 7.1% in FY19 to 7.5% in FY20. “The acceleration is based on our assumption of lower oil prices in FY20, an increase in confidence post-elections once the new government takes ofﬁce, and some easing of infrastructure bottlenecks. On balance, the risks to our growth outlook are tilted to the downside, given the continued confidence concerns relating to the non-bank financial companies," said Prachi Mishra, chief India economist, Goldman Sachs.
Concerns over inflation have also reduced with deflation in food prices continuing for the fifth straight month and core inflation softening to 5.5%. This, despite the fact that India’s headline CPI inflation rose to 2.6% in February, reversing a declining trend since July 2018.
In February, the MPC revised its consumer price inflation (CPI) projection for the first half of the next fiscal year from 3.4-4.2% to 3.2-3.4%, and fixed the third quarter inflation forecast at 3.9%. It however ignored the impact of both high core inflation—waiting to see whether the underlying reasons such as elevated costs of education and healthcare were secular in nature—and an expansionary fiscal policy. Majority of bankers and economists polled expected inflation for 2019-20 to settle below 4%, with a few expecting it to inch up to 4.10%.
The bond market is also factoring in at least two rate cuts this financial year.