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RBI may cut interest rates for the sixth straight time

Livemint logo Livemint 3 days ago Gopika Gopakumar

The central bank is likely to cut interest rates for the sixth straight time on 5 December despite a surprise spike in inflation, as the Reserve Bank of India (RBI) seeks to reverse a protracted growth slowdown in Asia’s third-largest economy.

a dog that is standing in front of a building: Indian banks, saddled with record bad loans, have failed to transmit the rate cuts to borrowers. © Provided by Livemint Indian banks, saddled with record bad loans, have failed to transmit the rate cuts to borrowers.

Eight out of 10 economists and treasury heads surveyed by Mint expect RBI’s monetary policy committee (MPC) to cut the repo rate, at which RBI lends to banks, by 25 basis points (bps) to 4.9%, while maintaining an accommodative stance. Two expect the RBI to cut rates by 15bps.

Economic growth has slowed to 4.5% in the September quarter, its weakest pace since 2013, despite a cumulative 135bps cut in policy rates this year. Indian banks, saddled with record bad loans, have failed to transmit the rate cuts to borrowers.

Output of capital goods, which indicates investment activity in manufacturing, contracted 20.7% in September against a 6.9% expansion in the year-ago period. After the October MPC meeting, governor Shaktikanta Das said the central bank will maintain its accommodative stance as long as it is necessary to revive growth, even as it ensures that inflation remains within target.

“Completely in line with our expectation, GDP in Q2 printed a 26 quarter low with most sectors showing a decline. Core GVA (gross value added) excluding agriculture and government services has printed a low of 3.4%. This further emphatically underscores the need of policy focus shifting to reviving growth. We continue to expect RBI to execute another rate cut in December of 25bps,” Shubhada Rao, chief economist at Yes Bank, said in a research note.

Despite the monetary stimulus thus far and a slew of government measures to boost the economy, economists do not expect an immediate recovery in growth momentum. Non-food credit growth has also slowed to 7.9% from a year earlier in the first week of November from 8.9% in October.

Inflation has also started accelerating with consumer price inflation quickening to 4.62% in October, breaching the 4% target for the first time since July 2018.

In its October policy, RBI projected CPI inflation at 3.5-3.7% for the second half of fiscal year 2019-20 and GDP growth at 6.1%. Many economists expect RBI to revise inflation forecast upwards to 4-4.5% and GDP growth forecast downwards to around 5-5.5% for the current fiscal year. “We expect RBI to cut the repo rate by 25bps to 4.9% next week (5 December), while downgrading growth and revising higher its inflation projections. We expect incrementally the focus to now shift to government measures on specific sectors and to revitalise the financial sector,” Nomura Global Markets Research said in its recent report.

“The RBI will mark down its growth forecast further in light of the fact that the first half growth has been below 5% and underlying growth drivers remain weak. While the headline inflation has crossed over the target and is expected to stay elevated, it is mainly due to transitory food inflationary pressures. Inflation forecast would be revised upwards, with average headline inflation expected to be around 4.8% over the rest of this fiscal. The mandate of the MPC however, allows it flexibility on the headline inflation in such a scenario,” said Gaurav Kapur, chief economist, IndusInd Bank.

However, economists remain divided over whether RBI will cut rates further before the end of fiscal year 2020. Half the economists polled expect RBI to cut rates by an additional 25bps during FY20.

“We reiterate our call of another 50bps of repo rate cuts through the rest of FY2020. Beyond that, the MPC will likely stay on hold and focus on transmission as the GDP growth gradually reverses to 5.5-6.0% and inflation hovers slightly above the 4% mark,” said economists at Kotak Mahindra bank in their latest report.

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(Video by CNBCTV18)

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