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RBI Likely to Go for Another 25bps Cut

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The Reserve Bank of India (RBI) is likely to reduce the cost of money for the second time in as many months as mounting concerns over a global economic slowdown, particularly in the US, and its impact on the emerging markets make investors rather wary of fresh investments into capital assets. According to an ET survey of 26 market participants, an overwhelming majority expect a quarter percentage point reduction in the repo, or the rate at which banks borrow short-term money, when the central bank concludes its monetary policy review Thursday. The repo is now set at 6.25%.
“Global economic conditions point to a synchronised growth slowdown, dampening oil prices,” said Gaurav Kapur, chief economist at IndusInd Bank. “This in turn will strengthen RBI’s rate-cut call as inflation is unlikely to spring a negative surprise over the next couple of quarters. RBI will focus more on ensuring future liquidity support to make the transmission of rate cuts more effective.” Two participants, including Aditya Birla Mutual Fund, believe that RBI would not alter the rates. In its February bi-monthly policy, it reduced the repo by 25 basis points. A basis point is one hundredth of a percentage point.
Earlier in March, global rating company Fitch cut India’s FY19 GDP growth forecast to 7.2% from 7.8% in December. It also reduced the FY20 growth forecast to 6.8% from its erstwhile estimate of 7%, citing weaker-than-expected momentum in the economy. India’s GDP growth slowed to 6.6% in the December quarter.
“Economic activity is showing signs of strain, and (those signs are) visible in weaker consumption proxies and sectors previously served by non-bank credit,” said Radhika Rao, economist at DBS Bank, Singapore. “The Monetary Policy Committee is on course to cut policy rates for a second consecutive time in April, retaining the distinction of being the first regional central bank that has returned to a policy easing cycle this year.” During the last policy announcement in February, the central bank forecast GDP growth for 2019-20 at 7.4%, with risks evenly balanced. It revised downward the consumer inflation prediction to 2.8% in the fourth-quarter of FY19, from 2.7-3.2% forecast earlier. The projection for H1 in FY20 is at 3.2-3.4%, with risks broadly balanced around the central trajectory.
Separately, the first inversion of the US yield curve in 12 years has also stoked concerns of a slowdown – perhaps even an imminent recession in the world’s biggest economy. The US Federal Reserve has also hinted at easing its monetary policy. More than a fourth of the respondents expect the Monetary Policy Committee to leave its rate stance unchanged at “Neutral”, which offers policy experts the flexibility to either cut or raise rates in response to the most current set of statistics. But risks to inflation have still not faded fully due to fiscal expansion and the uncertainty over crop yields.
ICICI Bank expects FY20 GDP to expand at 7.2%, with a slight downward bias. Inflation could average 3.8% year-on-year. “The growth-inflation mix has opened up the space for policy accommodation, although further action beyond April would be data-dependent,” said B Prasanna, head-global markets group at ICICI Bank. Consumer prices rose 2.57% in February this year compared with 1.97% in January. But prices are well below the RBI’s medium-term target of 4%. “The stage is ripe for a bigger rate cut,” said Soumya Kanti Ghosh, group chief economic advisor, economic research department, State Bank of India. “If the rate cut is of 25 bps only, the RBI could then indicate more cuts through a possible shift in its stance/policy statement.”
The Economic Times, 1st April 2019

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