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economy | IST

RBI MPC could cut rate in the August policy meet, say experts

The Reserve Bank of India is expected to cut the key rate by 25 basis points in the upcoming monetary policy, said Indranil Sen Gupta, India Economist at BofA Securities. One basis point is a hundredth of a percentage point.
Inflation in June came in higher than expected at 6.09 percent led by higher prices of services like education and food items like meat and fish. But economists expect that the RBI will cut rates at the next MPC meeting to push growth.
Speaking to CNBC-TV18, Gupta said, “We are of the view that one should look through this number because it is driven by methodological issues as well as supply-side disruptions. We think that the MPC should cut about 25 basis points on August 6 and 50 basis points in October.”
He further added that growth is 11 percent below potential, which isn’t inflationary. “In sum, we think that inflation will collapse to 2.5 percent in the second half of the year on base effect."
Gupta said that every month of lockdown costs 100 basis points in GDP in terms of contraction. “Our base case assumes that the lockdown can end in the middle of September and then it takes 6 weeks to restart. What we estimate is that every month of lockdown costs 100 basis points and so our case is that GDP contracts by 7.5 percent with lockdown persisting beyond till a vaccine is found," he said.
Neeraj Gambhir, President, Head Treasury and Markets at Axis Bank said, “The possibility of a rate cut is still fairly high. I don’t think this is an environment in which inflation is the driving factor as far as the MPC decision making is concerned. I think the key driver is growth and as has been pointed out, the growth for this year is going to be quite bad; estimates vary between 5-10 percent negative, but the reality is we are looking at an extremely weak growth environment.”
“MPC is focused on making sure that the impact of the pandemic on the economy is minimised and there is financial stability and there is adequate liquidity in the system. So, clearly there is a lot of focus on how the financial stability, how the market stability continues and I think that in the next meeting, MPC will further cut rates – discussion can be between 25-40 basis points,” Gambhir added.
Lakshmi Iyer of Kotak Mahindra AMC said, “Small move in the yields may not be ruled out, but I think the broader ingredients for a rally as far as the yield curve is concerned, still remain fairly intact.”