RBI may lend a helping hand to govt, cut policy rates by 25 bps
Six out of 10 economists expect repo rate to be cut to 5.15%, while maintaining an accommodative stanceAll experts believe that RBI is nearing the terminal repo rate of 5% before the end of the calendar year
PremiumMUMBAI : The Reserve Bank of India (RBI) is likely to cut policy rates by 25 basis points (bps) on Friday to support the government’s measures, such as reducing corporate tax, to boost economic activity amid benign inflation, according to economists and treasury heads surveyed by Mint.
Six out of ten economists and bankers polled expect repo rate, the rate at which RBI lends to banks, to be reduced to 5.15% while maintaining an accommodative policy stance. While three economists expect a 40 bps cut, one expects a 15 bps cut this time, followed by a 25 bps cut in the December policy. However, all experts unanimously believe that the central bank is nearing the terminal repo rate of 5% before the end of the calendar year, which will be followed by a pause in rate action.
In the August policy, RBI had reduced the repo rate by an unconventional 35 bps from 5.75% to 5.40%. The Monetary Policy Committee (MPC) has already cut rates by 110 bps so far this year in response to slowing growth and moderate inflation.
The minutes of the MPC meeting released post the rate review show that RBI governor Shaktikanta Das had explained that the current growth-inflation scenario can no longer be “business as usual" and that it warrants an unconventional action of 35 bps cut.
“Given the significant fiscal tax stimulus measure announced, the MPC is likely to deliberate two options. One, to scale back a continuing monetary policy easing, while evaluating the traction of fiscal measures. Two, to robustly support the fiscal measures, with deep cuts, together with lending rate benchmarking, leveraging a credit response to the tax cuts," said Saugata Bhattacharya, chief economist, Axis Bank.
Bank of America Merrill Lynch said in a report that it expects a 35 bps cut followed by 15 bps in December. “The fiscal stimulus has pushed markets to bring down their terminal repo rate expectations. Nudge to growth intended via this corporate tax rate cut can be difficult to come by if G-Sec and thus, lending rates reset higher (or their downward trajectory is hindered). To avoid such an unintended counterproductive impact, we think RBI MPC will continue with their easing bias," it said.
India’s latest gross domestic product (GDP) growth number at 5%, the weakest growth in more than six years, may prompt RBI to further reduce its full-year growth forecast. For the past few months, RBI has been shaving off its growth projections at each successive policy meeting. In effect, RBI has reduced its GDP growth estimate for 2019-20 by 50 bps in a span of five months. The majority of economists and bankers polled expect RBI to revise is growth forecast for FY20 to 6.5% in the Friday meeting.
“Growth indicators continue to remain weak and hence, we expect RBI to revise growth trajectory. By the end of the financial year, we can expect revival. For the financial year, we continue to see growth closer to 5.8%, which will warrant a monetary easing and hence we are looking at a 40 bps cut in October policy. Further monetary easing will be a function of how the previous rate cuts along with recent fiscal boost is expected to impact the real economy," said Upasana Bhardwaj, economist, Kotak Mahindra Bank.
Economists believe that RBI’s ability to cut rates will be further limited post December as inflation will pick up because of the base effect.
“I expect 25-35 bps cut on Friday. The window of opportunity for a rate cut is closing down. I don’t expect more than one cut after this. Beyond December, it will be difficult for RBI to justify a rate cut as inflation should hit 4% in January," said Sachchidanand Shukla, chief economist, Mahindra & Mahindra.
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