Money & Banking

RBI set to deliver fifth straight interest rate cut

Bloomberg Mumbai | Updated on October 04, 2019 Published on October 04, 2019

The Reserve Bank of India is set to deliver a fifth straight interest rate cut on Friday, although economists are unsure of the quantum following an unconventional 35 basis-point easing last time.

While all 39 economists surveyed by Bloomberg News expect a reduction, their forecasts range from 15 basis points to 40 basis points. The RBI has lowered borrowing costs to a nine-year low of 5.4% through 110 basis points of easing so far in 2019.

The meeting of the six-member Monetary Policy Committee led by Governor Shaktikanta Das comes amid growing concerns about banking and financial sector, and just weeks after Prime Minister Narendra Modi eased fiscal levers by announcing a surprise $20 billion tax break for companies.

 

Read: Room for a rate cut

The policy decision will be announced at 11:45 am in Mumbai, followed by a press conference 15 minutes later by Das.

Growth

The RBI has lowered its growth forecast for the current fiscal year three times already, with the latest revision in August pegging growth at 6.9%. Data since then has shown gross domestic product expansion slowing to 5% in the June quarter, the weakest pace in six years, and recent monthly indicators show no signs of a recovery.

The latest growth numbers look much worse, Das said recently, referring to RBI’s projection of 5.8% expansion in the April-June period. There is a slowdown, which was evident and at the last MPC he clearly said that growth seems to be losing traction and therefore, growth is a matter of highest priority.

Purchasing managers indexes released on Friday signalled more bad news for the economy. The services PMI plunged to 48.7 in September, the lowest since February last year, indicating a contraction in an industry that makes up more than half of GDP. While the manufacturing PMI released earlier this week showed factory output still expanding, the weakness in the services sector pulled down the composite index to 49.8 in September.

Inflation

A recent spike in onion prices notwithstanding, headline inflation has stayed below the RBI’s 4% medium-term target for 13 straight months.

Food and beverage prices, which account for about half of the consumer price basket, have climbed on the back of a surge in urban food inflation. Das has said gains in food inflation are cyclical and there will not be much pressure on prices, given monsoon rains appear to be normal.

Core inflation, which strips out volatile food and fuel prices, has been decelerating amid subdued demand. That will give the central bank ample space to keep policy accommodative in the coming months.

Financial Stability

In the past few weeks, concerns about the financial sector have taken center-stage and the press conference is likely to be dominated by questions about the health of some lenders.

The RBI recently imposed withdrawal curbs on a small bank and lending restrictions on another lender. That adds to the year long trouble brewing in India’s shadow banking sector where a default by a systemically important lender led to loan curbs and affected consumer spending.

Published on October 04, 2019
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