Shaktikanta Das, who was appointed as the governor of the Reserve Bank of India after the sudden resignation of Urjit Patel last year, has made it amply clear over the past few months that reviving growth remains a key priority. With the country’s GDP growth plunging to 5 per cent in the April-June quarter, one would expect the central bank to reduce its interest rates further.
However, having cut the benchmark repo rate by 110 basis points (1.10 per cent) so far this year and mandating banks to link their interest rates to repo or any other external benchmark for faster rate transmission, the question on everybody’s mind would be how much more would the RBI continue to reduce interest rates.
Importantly, government too has stepped in, announcing a slew of measures over the past few weeks to revive the economy, including the announcement to cut corporate taxes. This, though, could put pressure on India’s fiscal deficit, given that indirect tax collections have been below expectations. That too will weigh on the RBI’s monetary policy committee (MPC), which will announce its interest rates decision on Friday.
In the previous bi-monthly meeting, the MPC reduced the repo rate by an unconventional 35 bps. With inflation remaining well in check, Suvodeep Rakshit, senior economist at Kotak Institutional Equities, feels a sharper rate cut could be warranted.
“We pencil in a 40 bps of rate cut, which should be a signal to the market that the MPC is not quite done as it frontloads the remaining couple of rate cuts in the cycle,” said Rakshit.
Given that most banks have now started offering new loans linked to external benchmark, a sharper rate cut would help in quicker transmission, he added.
The corporate tax cuts as well as the export promotion measures announced by Finance Minister Nirmala Sitharaman are likely to pressure government revenues by Rs 1.55 lakh crore in the current financial year ending March 2020, although a part of the shortfall could be bridged by the surplus transferred by the RBI.
Despite the fiscal stimulus, the weak concurrent indicators signal more rate cuts, says Sonal Varma, chief India economist at Nomura Securities, who has also pencilled in a 40 bps rate cut, that will bring down the repo rate to 5 per cent.
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“At the margin, fiscal activism could be seen as reducing the burden on monetary policy to lift growth. However, given the limited growth and inflation impact of corporate tax cuts in the near-term, we do not expect the monetary policy path to materially differ. In line with this assumption, we expect the RBI to reduce the policy repo rate by more than 25 bps,” said Varma.
The rate cuts could be aimed at giving a push to credit demand in the festive season, added Varma.
Sushant Hede, associate economist at CARE Ratings, sees the central bank reducing the repo rate by 25 bps this time around, which “could supplement the government fiscal measures to propel the economy.”
Abheek Barua, chief economist at HDFC Bank, is also expecting a 25 bps rate cut this time around.
