Economy

RBI likely to cut repo rates by 25 bps, but still no respite for economy

Updated : November 27, 2019 07:00 AM IST

RBI would cut its repo rate for the sixth time in a row by 25 basis points to 4.90 percent at its December 3-5 meeting, according to Reuters poll

The economists forecast that these reductions would either marginally boost the economy or have no impact.

The Reserve Bank of India is expected to cut interest rates in its December bi-monthly monetary policy and again before July, according to economists in a Reuters’ poll. However, the economists forecast that these reductions would either marginally boost the economy or have no impact.

The latest Reuters poll predicted the RBI would cut its repo rate for the sixth time in a row by 25 basis points to 4.90 percent at its December 3-5 meeting, according to median forecasts from more than 70 economists. That would mark the longest streak of consecutive rate cuts since the current interest rate framework was introduced nearly 20 years ago.

If the poll is correct, 160 basis points of cumulative rate cuts this year would be the most in a calendar year since 2009.

The RBI is then expected to chop another 15 basis points in the second quarter of 2020, taking the repo rate to 4.75 percent, where it will stay at least until 2021, according to the poll.

Currently the most aggressive major central bank in the world, the RBI has cut rates by 135 basis points this year to 5.15 percent, but inflation has remained low by historical standards and policymakers have barely moved the needle on growth.

The Indian economy expanded 5.0 percent in the April-June quarter on a year earlier, its slowest annual pace since 2013, and was expected to grow 4.7 percent last quarter, according to the latest Reuters poll, taken November 20-25.

That was significantly lower than the 5.6 percent rate predicted in the last poll, and would mark six consecutive quarters of slowing growth, a first since 2012. It also comes despite a recent series of fiscal stimulus from Prime Minister Narendra Modi’s government, which was re-elected in a landslide in May.

“Further rate cuts are likely to have a limited impact on the economy as cost of borrowing is not the pressing issue. The lack of risk appetite and fragile sentiment are holding back fresh investment in the economy,” said Sakshi Gupta, senior India economist at HDFC Bank.

“While further interest rate cuts would support growth at the margin, we need to see a turnaround in sentiment to restart the investment cycle.”

Recent business surveys have suggested the economy would not improve in the near-term.

A significant minority of economists - 24 of 56 - who answered an additional question in the poll said rate cuts would marginally boost the economy, while nearly a third said they would have little or no impact.

The remaining 15 economists said rate cuts would prevent growth from slowing further and none said they would significantly boost the economy.

“We don’t expect any miracles from lower borrowing rates,” said Hugo Erken, head of international economics at Rabobank.

“In order to push India’s growth trajectory back on track, the government should step up its efforts by forging a reform package which tackles labour market rigidity, housing market woes, et cetera.”

RBI likely to cut repo rates by 25 bps, but still no respite for economy

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