New Delhi: Reserve Bank of India Governor Shaktikanta Das had this to say when the central bank’s Monetary Policy Committee in August departed from the usual practice of tweaking interest rates by 25 basis points (bps) or 50 bps and instead cut the repo rate by 35 basis: “What is so sacred about 25 (bps rate cut) and its multiples? When you do something out of convention, too much shouldn’t be read into it!"
The jury is still out on how much the rate cut this time would be when the MPC meets this Friday to arrive on the all-important decision. A Bloomberg poll of 25 economists showed that a 25-basis-points cut to 5.15% in the repo rate is widely expected. Some economists even see a possibility of a rate cut of up to 40 basis points.
If so, this will be the fifth consecutive rate cut by the MPC this year, which has so far cut the repo rate by 110 basis points. However, there are concerns that the banking system has not completely passed on the benefits of the rate cuts to the customers.
Besides transmission of rates, MPC’s commentary on the economic growth, which hit a six-year low of 5% in the June quarter due to a sharp fall in consumer demand and subdued private investment, will also be important in the current day scenario.
Here is a list of three things that you need to look for at Friday’s policy meet:
Rate cut: Taking into account benign inflation, economists expect that the MPC has more room for a rate cut. With four consecutive rate cuts so far, including an unconventional 35 basis point cut in August, the committee has managed to keep inflation well within its medium-term target of 4%.
The MPC projected Consumer Price Index (CPI) inflation at 3.5-3.7% in the second half of this financial year and said it will watch for factors such as monsoon impact on food prices and crude oil prices amid geo-political tension in the Middle East. A rate cut will further enable banks to lend to customers at cheaper interest rates. Though not entirely, banks have so far tried aligning their interest rate cuts with that of the regulator.
Word on economy: In the August credit policy, the MPC had acknowledged prevailing growth concerns and had said boosting demand and private investment assumed highest priority. The committee had projected India’s GDP growth at 6.9% for 2019-2020, which is higher than the average estimate. While Moody’s Investor Service pegged GDP growth at 6.2% for this fiscal, S&P Global Ratings forecast stood at 6.3% owing to a slowdown in private demand. The government in September sharply reduced corporate tax rate to 22% from 30%. Economists believe this may revive business activity but private consumption will remain an area of concern.
Banking health: Frauds, exposure to large but financially weak companies, violation of corporate governance norms, liquidity concerns and declining asset quality are some of the factors ailing the banking sector. As a result, investors are ruthlessly selling off bank stocks. MPC’s commentary may overturn the negative sentiment that is dragging down the sectoral index.
RBI watchers will also look at comments on shadow banks or non-banking financial companies (NBFCs) and announcements that may improve their liquidity positions. The NBFC crisis had a domino effect on auto and real estate sectors, which borrowed from non-banks to avoid delays and tighter lending norms, adding to the woes of a slowing economy.