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RBI may make it three cuts in a row to boost growth

06-Jun-2019

The Reserve Bank of India’s monetary policy committee led by governor Shaktikanta Das will announce its policy decision on Thursday amid slowing economic growth and global uncertainty. The market is expecting a 25-basis point cut in key policy rates, along with a change in policy stance to accommodative from neutral.

Given the ongoing economic slowdown, with both the consumption and investment engines faltering, there are hopes that RBI will use monetary policy to stimulate the economy. The central bank’s actions will also set the stage for the Union budget that will be announced on 5 July.

Das will also have to contend with a sticky transmission pipeline, with commercial banks having reduced lending rates by only 5-10 basis points (bps) over the past four months against the central bank’s 50-basis point reduction during the same period.

The market has varying demands on RBI. With inflation easing, India’s real interest rates are perhaps among the highest in emerging economies and provide headroom for readjustment. There are also expectations that the central bank might think beyond a 25 bps cut, even if the cut is not as deep as 50 bps. This school of thinking has been inspired by Das’s comments at the annual spring meeting of the World Bank and International Monetary Fund that central banks should not restrict policy rate actions to 25bps or its multiples.

Mint survey earlier this week showed that seven of the 10 economists and bankers polled expect RBI to cut benchmark repo rate by 25 bps to 5.75% due to a higher-than-expected slowdown in growth. One of them expects a rate cut of more than 25 bps and the rest called for a pause this time. Half of the participants surveyed said the central bank would stick to its neutral stance in the upcoming policy. One of them said he expected RBI to either change it to accommodative or do away with the practice of declaring a stance.

With lower oil prices and increased confidence post the general elections, the market expects RBI to retain the growth outlook at 7.2% for the current fiscal.

The World Bank’s latest edition of Global Economic Prospects, however, estimates India’s economic growth to stay steady at 7.5% during the next three years, driven by robust investment and private consumption.

India’s headline inflation stood at 2.9% year-on-year in April, below RBI’s 4% target. Core inflation (excluding food and fuel) has also slipped to 4.3% from 5.4% in December, with tight liquidity. While food inflation is expected to pick up over the course of the year, economists do not expect RBI to waver from its current inflation outlook.

Liquidity had been in deficit mode for the past few months, but has come back to neutral after government spending picked up post the elections. System liquidity has moved from a deficit of35,800 crore on 4 April (the date of the previous monetary policy announcement) to a surplus of 95,400 crore now.

The market will also watch out for commentary from Das on the new restructuring framework for bad loans that is expected to replace the 12 February 2018 circular.

The market will also await the governor’s comments on monetary policy transmission and whether enough has been done by banks to pass on the rate cuts.

Source : Live Mint

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