Edelweiss is expecting the Reserve Bank of India (RBI) to cut the repo rate by 25 to 50 basis points in the December monetary policy. One basis point is a hundredth of a percentage point.
Edelweiss believes that the rise in inflation should not hold back the RBI from supporting growth.
The gross domestic product (GDP) growth for the second quarter (July-September) of the financial year 2019-20 dropped to 4.5 percent, the weakest pace in more than six years. Meanwhile, inflation has inched higher to over 4 percent (and may cross 5 percent soon).
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According to a report by Edelweiss, the domestic economy is witnessing a sharp and prolonged slowdown — visible across FMCG, car sales, capex, government tax revenues, etc. The recently announced GDP numbers for Q2FY20 also portray this broad-based weakness. Q2FY20 was the sixth consecutive quarter of slowdown — the longest in a decade, it noted.
The December quarter has already started on a weak note with October core sector growth lingering in deep contraction and if H2FY20 sees a slowdown in government spending (as revenues are weak), it will further hurt aggregate demand, Edelweiss explained.
"Recent CPI readings have come above 4 percent, largely on account of a spike in vegetable prices. Overall food inflation dynamics, however, remain quite benign. Core inflation (ex-commodities) was at 3.8 percent — a series-low, reflecting entrenched demand weakness in the domestic economy," said the report by Edelweiss.
While the RBI targets headline CPI, Edelweiss believes it should overlook the recent spike as it is largely attributable to vegetables.
It further noted that globally as well, central banks are going ahead with monetary easing after Fed turned dovish. Hence, there is ample space for the RBI to continue with rate easing, it added.
First Published: IST