Money & Banking

Will another rate cut by the RBI spur growth?

Surabhi Mumbai | Updated on December 05, 2019

According to analysts, sentiment is subdued and credit demand weak, but H2 growth is likely to be better

Amid expectations of another rate cut by the Monetary Policy Committee at the fifth bi-monthly monetary policy meet on Thursday, economists believe that it may not have the desired effect as both business and consumer sentiments are subdued.

However, economic growth is expected to be a tad better than the first half, on the back of the base effect and some improvement in consumption demand. “Another rate cut may not mean much for the economy in the short term as both business and consumer sentiments are down as they are not willing to spend,” noted Sunil Kumar Sinha, Principal Economist and Director, Public Finance, India Ratings.

GDP growth, which touched a 26-quarter low of 4.5 per cent in the second quarter of the fiscal, will see some recovery in the next two quarters, said Sinha, attributing it to the base effect. “Statistically, the numbers will look better, but it doesn’t take away the fact that growth has slumped,” said Sinha.

For the second half of the fiscal, India Ratings has pegged GDP growth at 6.2 per cent and for the full fiscal year at 5.6 per cent. The economy is estimated to have grown at about 4.8 per cent in the first half of the fiscal year.

Transmission of rate cuts

Analysts also point out that the transmission of rate cuts by banks has not happened fully, which could have initially helped spur demand and boost consumption.

Revising its growth forecast for the fiscal to 5.1 per cent from 6.3 per cent earlier, CRISIL said that while demand for credit is weak, its supply is also constrained. “Risk-aversion has meant caution on lending. Transmission of monetary policy is also restrained because of the stress. Consequently, green shoots of growth will take time to show up,” it said. Despite a cumulative 135-basis-point reduction in repo rate since February 2019, the lending rates of banks also started to respond in the same direction only recently. MCLR rates have been reduced by 49 basis points till date since February this year, a YES Bank report noted. A

According to a recent report by ICICI Securities, real GVA is estimated to have grown by 4.7 per cent in October, against 3.9 per cent in September and 6.1 per cent year-on-year. “In October 2019, real GVA growth stood at a three-month high, marking good start to the third quarter. We need to monitor high-frequency data regularly; however, early indicators show that growth in Q3 FY20 could be between 4.9 per cent and 5.3 per cent,” it said.

“We expect the MPC to cut rates by 25 basis points while maintaining its accommodative policy stance. In addition, we also expect to see downward revision to the RBI’s 2019-20 GDP growth forecast of 6.1 per cent, upward revision in its 2019-20 CPI inflation forecast, cues on future monetary policy trajectory, acknowledgement of growing fiscal risks…,” said Shubhada Rao, Chief Economist at YES Bank.

Published on December 04, 2019

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor

You May Also Like