The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is likely to bring down the benchmark policy rate by a quarter percentage point in its third bi-monthly policy decision this week, according to a poll conducted by
With the headline inflation broadly tracking MPC’s estimates and core inflation moderating since the last policy, monsoon shortfall easing and growth appearing to remain subdued for some time, the markets are factoring in a rate cut.
All ten economists polled by
CNBC-TV18 expect the MPC to bring down repo rate, which is the rate at which RBI lends to banks, to 5.50 percent from 5.75 percent currently. This would be the fourth consecutive rate cut undertaken by the central bank, after it reduced the repo rate by 25 basis points each in the February, April and June policies this year.
The RBI is also expected to stick to its ‘accommodative’ stance, and could bring down repo rates by another 50 basis points in 2019, including the August policy, a poll by
Half of the respondents expected a 50 basis points reduction in rates in this calendar year, 40 percent respondents expect only one 25 basis point reduction, and the remaining 10 percent expected a 75 basis points cut in repo rates. One basis point is one-hundredth of a percentage point.
“Since the last policy, data and emerging trends indicate that inflation continues to be stable and is trending on the lower side. Further, growth has been muted on account of visible consumption slowdown as well as subdued investment outlook. Despite a late start we have seen that the monsoon has reasonably caught up, which should give a boost to agriculture and lead to the revival to some extent of consumption in rural India.
"Globally, we have seen negative yields in certain countries and overall interest rates are stable or dropping and growth has slowed. Against this backdrop, the central bank is likely to cut the repo rate by 25 bps,” said Shanti Ekambaram, president – consumer banking, Kotak Mahindra Bank.
Half of the respondents to the poll expect the growth forecast to be lowered to around 6.8-6.9 percent from 7 percent forecast for FY20 currently. India’s gross domestic product (GDP) growth slumped to a five-year low of 5.8 percent in the January-March quarter as consumption demand slowed down.
Eight infrastructure sectors, which constitute 40.27 percent of the index of industrial production (IIP), grew 0.2 percent in June, at a 50-month low.
Inflation as measured by the consumer price index (CPI) inched up from 3.05 percent in May to 3.18 percent in June, but remained below RBI’s medium-term target of 4 percent, giving adequate room to RBI to bring down rates, economists argued.
Eighty percent of the respondents expect the RBI to leave its CPI forecast of 3.4-3.7 percent for the second half of the current financial year to be left unchanged, but some did expect the MPC to highlight upside risks to this forecast.
Sixty percent of the respondents expect the statement of the policy to be similar to the June policy, whereas 40 percent are expecting a more dovish tone.
Soumya Kanti Ghosh, group chief economic adviser, SBI, said in a note, “The bond markets are giving off signs of heightened uncertainty…While expenditure growth has been largely contained, capital expenditure seems to be the casualty. Such a cutback will surely act as growth dampener. Rainfall, though has picked up significant pace, its spatial distribution is a matter of serious concern, with cereal, potato, onion and oilseed growing states bearing the brunt.
"However, there is now a nascent consensus building-up that recent surge in rainfall might give a face lift to rural demand. Against this global and domestic economic backdrop we now believe that RBI should cut repo rate by 25 bps in the August 7 policy and further reduce it by 50-75 bps to achieve the level of <= 5 percent by March 20.”
Besides the monetary policy, most economists Economists will also be watching out for any comments from the RBI on the government’s proposed overseas borrowing programme and the current liquidity crisis among non-banking finance companies (NBFCs).
CNBC-TV18 spoke to said they would want to hear a firm commitment from the central bank that it would continue to keep the system liquidity in a surplus mode, as also comment on the progress of their internal Liquidity Framework Report, which was recently set up to review and simplify the liquidity management position.