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RBI monetary policy: Central bank likely to cut repo rate today to boost economy as fiscal measures fail to cheer

FP Staff

The Reserve Bank of India is likely to go for yet another rate cut on Friday, the fifth in a row, as inflation is within the comfort zone and the need to boost the economy is pressing. Recent fiscal measures to boost ailing growth seem largely inadequate and benign inflation offers room for more easing.

It is almost a foregone conclusion that the Reserve Bank of India (RBI) will go for at least 25 bps cut in the repo rate based on what the Monetary Policy Committee (MPC) decides. It is foregone because it is logical given the developments that have taken place in the last month or so. The markets hence should not really be surprised and it is possible that the yields on bonds may not move much, said Madan Sabnavis, Chief Economist at CARE Ratings in an earlier piece in Firstpost

RBI Governor Shaktikanta Das has already hinted that benign inflation provides room for further monetary policy easing while space for fiscal space is limited.

The government has announced a series of measures including the steepest cut in corporate tax, the rollback of enhanced surcharge on Foreign Portfolio Investors, among others to jump-start growth which hit a six-year low of 5 percent during the first quarter of the current fiscal, a PTI report said.

The six-member MPC is scheduled to announce the fourth bi-monthly monetary policy for 2019-20 on Friday, after a three-day meeting.

There was no meeting of the panel on 2 October on account of Mahatma Gandhi Jayanti.

The RBI is predicted to lower its key lending rate or the repo rate by 25 basis points (bps) to 5.15 percent, which would take cumulative cuts so far this year to 135 bps, a Reuters report said.

Most analysts forecast one more cut of 15 bps in December.

Some RBI watchers expect a larger cut this week, after it cut the repo rate but an unconventional 35 bps in August.

"With current inflation remaining benign, we expect RBI to opt for a 40 bps rate cut at its policy review later this week in a bid to continue its support toward growth revival," said Yuvika Oberoi, an economist with Yes Bank in Mumbai.

Asia's third-largest economy expanded by just 5 percent in the June quarter, its slowest pace since 2013. That has raised expectations the RBI will be forced to further downgrade its growth projection of 6.9 percent for the current fiscal year.

The central bank has already slashed repo rate four times consecutively this year amounting to 110 basis points in aggregate.

At its last meeting in August, the Monetary Policy Committee (MPC) reduced the benchmark lending rate by an unusual 35 basis points to 5.40 percent.

The upcoming MPC meeting comes in the backdrop of RBI's mandate to banks to link their loan products to an external benchmark, like repo rate, for faster transmission of reduction in policy rates to borrowers, from 1 October.

However, not all economists were as aggressive with their rate cut bets, saying the central bank will likely reserve some firepower and wait to see how inflation pans out.

In a bid to revive business activity, the government in September announced a sharp cut in the corporate tax rate€"to 22 percent from 30 percent.

But while the tax cut brings the cost of doing business in India into line with its main Asian rivals, the government's move will do little to fix a lack of spending power, economists say.

"The recent volatility in crude oil prices and the fiscal measures announced by the government will have an impact on inflation in the medium-term and the fiscal deficit," said Shanti Ekambaram, president of consumer banking at Kotak Mahindra Bank.

"Hence, expect the MPC to be more measured in its response with a rate cut of 20-25 bps," she added.

Inflation in August accelerated to a 10-month high but remained well below the central bank's medium-term target of 4% for a 13th straight month.

Ahead of the meeting, the Das-headed Financial Stability and Development Council (FSDC) sub-committee took stock of the prevailing macroeconomic situation.

Earlier, the RBI Governor had said that the government has little fiscal space, giving hope that the central bank may provide more monetary stimulus to prop up the economy.

The government's fiscal space has been squeezed on account of cut in rates of corporate tax as well as lowering of GST rate on various goods. Revenue collection too has been below the Budget estimates.

Experts are of the opinion that another rate cut is on the cards as the government's hands are tied and the onus of taking initiatives now rests with the central bank.

Shanti Ekambaram, President, Consumer Banking, Kotak Mahindra Bank, said with inflation still within the RBI's medium-term target of 4 percent, the MPC has the headroom to cut the repo rate further.

"However, the recent volatility in crude oil prices and the fiscal measures announced by the government will have an impact on inflation in the medium term and the fiscal deficit. Hence, we expect the MPC to be more measured in its response with a rate cut of 20-25 basis points in the October policy," she said.

"We continue to expect the RBI MPC to follow RBI Governor into another 'out-of-the-box' 35 basis points repo rate cut on October 4. This should send a strong signal for bank lending rate cuts with the 'busy' industrial season round the corner," BofA Merrill Lynch said in a report.

According to NAREDCO president Niranjan Hiranandani, there is an expectation of a further 50 basis points repo rate cut in the backdrop of muted inflation which stands lower than the expected 3.2 percent.

The further reduction of repo rate will not only bring down the lending rates but also incentivise investment and boost consumption, he said.

While economic activities are showing signs of sluggishness, the policymakers are drawing solace from the fact that retail inflation remains in the comfort zone of the central bank.

Retail inflation inched up to 3.21 percent in August but remained within the RBI's comfort zone.

The RBI has been mandated by the government to ensure that inflation remains below 4 percent, with a deviation of 2 percent on either side.

Experts and industry feel low inflation provides enough headroom for the RBI to further lower the policy rate, especially when the festive season has just started. People make huge purchases during Navratras and Diwali.

With liquidity concerns in the NBFC sector almost taken care of, the real estate sector too is hopeful that the RBI will go in for the much-needed rate cut to boost demand for affordable housing.

If the RBI delivers a 25 bps cut as expected, traders will focus on the wording and tone of the monetary policy statement for clues on further easing.

Economists also said the policy transmission process could improve after the RBI mandated banks to link all fresh loans to an external benchmark like the repo rate or the rate on short-term treasury bills since the start of this month.

India's banks have passed only a small portion of the RBI's cuts this year to their customers.

--With inputs from agencies

Also See: RBI begins monetary policy review meet; interest rate cut on cards to boost economy

RBI Monetary Policy LIVE Updates: Not aware of any demand for interim dividend, says Shaktikanta Das

RBI cuts repo rate by 25 bps to 5.15%: Full text of fourth bi-monthly policy statement for fiscal 2019-20

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