Money & Banking

RBI may cut policy rate by 25 bps: experts

NS Vageesh G Naga Sridhar Mumbai/Hyderabad | Updated on January 23, 2018

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Say growth needs a booster

The RBI will cut its key repo rate by 25 basis points in its June 2 policy review, experts say. Industry obviously wants more but experts think that this modest cut is probably the most likely course for the central bank.

The case for a cut is predicated on the trends in inflation and growth. Consumer Price Index-based inflation touched a low of 4.87 per cent last month. Now, the RBI is well on course to meeting its inflation target of 6 per cent by January 2016.

The RBI has a mandate to bring inflation down to 4 per cent in the next two years, according to the new monetary policy framework it signed with the Finance Ministry earlier this year.

Although the battle against inflation is under control, growth sentiments need a revival. The economy expanded 6.9 per cent last fiscal and the Government hopes it will grow by 7.5 per cent this fiscal.

However, industrial activity on the ground in terms of new projects and investments remain flat and companies admit demand for goods is still weak. A cut, many say, will be necessary to spur further investments.

Brinda Jagirdar, economist, thinks growth needs a push and a cut will help. “The RBI has a short window of opportunity to do it now,” she said, alluding to the comfortable numbers on inflation, a slight delay in the US Fed’s plan to hike rates later this year, and the relatively milder impact on prices due to unseasonal rain.

The RBI has cut rates twice this year, both times outside its regular policy cycle, although that has not yet been fully passed on by banks.

Jagirdar however, thinks that this time will be different. She explains that the earlier cuts came at a time when banks had to worry about repairing their balance sheets at the end of the fiscal. While it would be good for the RBI to cut rates by 50 bps, she expects it will go for a 25-bps cut now and keep another 25 bps for the busy season.

R Athmaram, Executive Director, Bank of Maharashtra, concurs with that view and told Business Line that he expects the RBI to settle for a 25-bps cut.

Key parameters positive

R Kalra, MD and CEO, Andhra Bank, feels that all key market parameters such as CPI, WPI and IIP are showing a trend that might allow a rate-cut now. Markets are already factoring this in and government securities are responding positively, he said. Corporation Bank announced a 25 bps reduction in its lending rate today.

But some feel that a mere 25 bps cut might not mean much for overall credit demand and liquidity. According to A Subba Rao, CFO, RPG group, the RBI might not act in a hurry. Another 25-bps cut is not going to change the economy.

“I do expect another 50 bps cut by the end of the year. The RBI will wait for inflation to fall further,” he feels.

Nilesh Sathe, Chief Executive, Nomural Mutual Fund AMC, said he too did not expect a cut in this policy, although he has pencilled in a 50-bps cut before the end of the year. The onus will be on banks to cut rates, he said.

Published on May 26, 2015

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