Money & Banking

RBI may have headroom for 25 bps repo rate cut

Our Bureau New Delhi | Updated on August 04, 2019 Published on August 04, 2019

With the government having limited wiggle room for a stimulus package to lift the sagging economy, the Reserve Bank of India is expected to continue to do some heavy lifting to revitalise growth by cutting the policy repo rate by 25 basis points for the fourth time on the trot in the upcoming bi-monthly monetary policy review.

In the 2019 calendar year so far, the repo rate has been cut thrice by 25 bps each, from 6.50 per cent to 6.25 per cent in February; 6.25 per cent to 6 per cent in April; and 6 per cent to 5.75 per cent in June.

The six-member MPC will meet from August 5 to 7 in the backdrop of the economy facing headwinds as underscored by the growth of eight core industries decelerating to a four-year low of just 0.2 per cent in June 2019, from a robust 7.8 per cent in June 2018; a sales slump in the automobile sector; the slackening of investment activity; and the possibility of exports getting impacted due to the global economic slowdown.

Though the government is facing fiscal constraints to pump-prime the economy, the RBI may have headroom to cut rates to support growth as retail inflation is benign (at 3.20 per cent in June, well below the MPC’s targeted median rate of 4 per cent) and the monsoon is catching up across the country.

Shanti Ekambaram, President — Consumer Banking, Kotak Mahindra Bank, observed that since the last policy, data and emerging trends indicate that inflation continues to be stable and is trending on the lower side. Further, growth has been muted on account of a visible consumption slowdown and subdued investment outlook.

“We have seen that the monsoon has reasonably caught up, which should give a boost to agriculture and lead to the revival to some extent of consumption in rural India... Against this backdrop, the central bank is likely to cut the repo rate by 25 bps,” she said.

Edelweiss Securities, said the Indian economy is in the throes of a broad-based slowdown. “In this backdrop, we argue that some form of a stimulus is required to kick-start the economy,” it said in a report.

“In our view, the RBI should ideally front-load a 50 bps rate cut at its forthcoming meeting on 7 August 7, but the RBI Governor’s recent interview (where he said the change in accommodative stance itself has ‘in effect’ led to a 25 bps rate cut) suggests a more measured approach. Hence, a 25 bps rate cut looks more probable,” elaborated the report.

Anagha Deodhar, Research Analyst, ICICI Securities, expects the MPC to unanimously vote for a 25 bps repo rate cut as the inflation is evolving along MPC’s projected path, growth impulses are still weak, real interest rates are high (and not conducive for an economy which is experiencing slowdown), and monetary policies across the world are accommodative.

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Published on August 04, 2019
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