Money & Banking

RBI seen cutting rate by 25 bps as industry slows

Our Bureau New Delhi | Updated on March 31, 2019

PO03_Rate_cut   -  valdis torms/shutterstock.com

Retail inflation in RBI’s comfort zone

A deceleration in industrial activity and the fear of a global economic slowdown are expected to prompt the Reserve Bank of India to cut the repo rate by 25 basis points in the monetary policy review scheduled on April 4. 

Retail inflation staying below the RBI’s 4-per cent target is a comfort factor for the central bank to put through a second rate cut on the trot. Market players say a rate cut to support growth will be opportune.

Industrial growth, represented by the Index of Industrial Production, dipped to 1.7 per cent in January from 2.6 per cent in December 2018. 

Though the retail inflation, as measured by the consumer price index, rose to a four-month high of 2.57 per cent in February against 1.97 per cent in January, the reading is still lower than the RBI’s inflation target of 4 per cent.

In its sixth monetary policy review, in February, the central bank had cut the repo rate from 6.50 per cent to 6.25 per cent. The repo rate is the rate at which the RBI provides funds to banks to overcome short-term liquidity mismatches.

Union Bank of India MD & CEO Rajkiran Rai G said: “Rate cut seems to be very much visible now. The last monetary policy committee (MPC) meeting talked about output gap (opening up modestly). I think the RBI was very clear last time when they spoke that they are trying to push growth. There are indications of global growth weakening. So, a rate cut will give a fillip to growth.”

 

Stage ripe for larger cut

Soumya Kanti Ghosh, Group Chief Economic Advisor, State Bank of India, said: “Rural demand continues to look increasingly weak and fragile... Urban demand is also worrying. A deceleration in global trade growth is also impacting export outlook through the trade channel. Investment scenario, as can be inferred from order inflows, has declined in Q3FY19 by 20 per cent. Credit growth is not broad-based and is in selective areas. 

“We expect at least a 25 basis points rate cut in the April policy (cumulative 50-75 bps over next 2/3 policies) though we believe the stage is ripe for a larger rate cut. If the rate cut is of 25 basis points only, then the RBI could indicate more cuts through a possible shift in stance/ policy statement.”

Published on March 31, 2019

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