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After cutting the policy repo rate by an 'unconventional' 35 basis points in the August bi-monthly monetary policy review, the Reserve Bank of India is expected to cut it further by up to 25 basis points in the upcoming October 4 review to complement the recent corporate tax cuts announced by the government to reverse the slowdown in growth.
Financial market experts say the magnitude of the repo rate cut could be lower this time as the RBI has cumulatively slashed it by 110 basis points in the calendar year so far.
The latest retail inflation reading at 3.21 per cent for August, which is lower than the mandated 4 per cent inflation target, gives the RBI headroom to cut rates to spur growth.
The RBI may also want to see how the new lending rate regime, linking banks’ retail and micro and small enterprise loans to an external benchmark with effect from October 1, responds to a rate cut in the backdrop of ample liquidity in the banking system.
Also read:Will the RBI cut rates after the Centre’s big stimulus?
Repo rate is the interest rate at which the central bank provides liquidity to banks to overcome short-term liquidity mismatches. Currently, this rate is at 5.40 per cent.
Marzban Irani, Chief Investment Officer (Debt), LIC Mutual Fund, expects the monetary policy committee (MPC) to cut the repo rate by around 25 bps mainly due to the dismal growth numbers for the June quarter. Even the September quarter growth numbers are expected to be weak due to the slowdown, he added.
“However, the government has already announced a large fiscal stimulus by way of tax cuts which will boost sentiment and that is likely to have a growth-enhancing impact in the second half (of FY2020).
“Headline inflation has been under control at below 4 per cent, which is the medium term target of the RBI. Globally also, the central banks are dovish and the rates are lower. Oil prices have remained range-bound and the monsoon has been reasonably good. All this points towards a rate cut in the October policy,” said Irani.
Abheek Barua, Chief Economist, HDFC Bank, sees a smaller repo rate cut (15-25 bps) by the central bank given that the fiscal stimulus is likely to take some pressure off the RBI to support growth.
Anagha Deodhar, Analyst, ICICI Securities, said in spite of the large stimulus, the MPC is expected to cut the repo rate by 25 bps.
However, going forward rate cuts will be difficult as the corporate tax cut is likely to boost growth and push up inflation.
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