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RBI Monetary Policy: How low can rates go? Nirmal Bang answers

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With already 75 basis points rate cut in 2019, and another 25 bps rate cut largely priced in ahead of the August monetary policy meet of the RBI taking the repo rate to 5.50 percent, the question arises, how low can the repo rate go?

RBI Monetary Policy: How low can rates go? Nirmal Bang answers
With already 75 basis points rate cut in 2019, and another 25 bps rate cut largely priced in ahead of the August monetary policy meet of the Reserve Bank of India (RBI) taking the repo rate to 5.50 percent, the question arises, how low can the repo rate go? It is clear that in case of decline in global growth, the RBI cuts rate, said a report by Nirmal Bang.
Over the past 20 years, the repo rate was below 5.50 percent only for a brief period between March 2009 and June 2010 in the aftermath of the global financial crisis.
In FY10, the fall in policy repo rates to 4.75 percent in April 2009 until March 2010 was on account of the sharp fall in global growth, while G-Sec yields have been below 6 percent only between April 2003 and June 2004 on account of decline in domestic growth.
"G-Sec yields slipped below 6 percent in FY04 as the RBI was cutting policy rates in the face of slowing domestic growth. GDP
The global growth fell from 5.7 percent in 2007 to 3 percent in 2008. During that time India’s growth also fell from 9.8 percent in FY07 to 3.9 percent in FY08, however, it recovered sharply to 8.5 percent in FY09.
However, the sharp cut in rates was followed by a bout of high inflation in India, with CPI moving up from 6.2 percent in FY08 to 12.3 percent in FY10.
Therefore, a sharp global slowdown and aggressive easing by global central banks may pave the way for aggressive easing by the RBI, according to Nirmal Bang.
"We can conclude that the RBI has responded to slowing growth by reducing rates. However, in this cycle, the RBI has already cut rates by 75 bps to below 6 percent and another 25 bps is already priced in. Therefore aggressive rate cuts are unlikely, a global recession notwithstanding," Nirmal Bang said in a brokerage report.
Nirma Bang expect a pause after the 25 bps rate cut in August 2019, with further rate cuts of about 50 bps likely in early FY21.
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