RBI PANEL LIKELY TO CUT REPO RATE ON AUGUST 2
MUMBAI: The Reserve Bank of India’s (RBI) monetary policy committee (MPC) may cut interest rates by 25 basis points on Wednesday after retail inflation hit a record low in June, economists say.
Of the 15 economists surveyed by Mint, 11 expect the central bank to cut the repurchase rate — the rate at which the central bank infuses liquidity in the banking system — by 25 basis points.
“At the August 2 meeting, we expect the RBI to cut rates by 25 bps but maintain its neutral policy stance,” a Morgan Stanley report dated 26 July said.
The Indian economy has been struggling. Economic growth slowed to 6.1% in the March quarter because of demonetisation and credit growth to companies has slowed to a trickle as banks are weighed down by a pile of bad loans.
The June quarter earnings data now also points to a slowdown in some sectors ahead of the introduction of the goods and services tax (GST) on 1 July.
At the previous bi-monthly monetary policy review, the MPC had kept repo rate unchanged at 6.25% but lowered its inflation forecast to 2-3.5% for the first half of the fiscal. However, since then, inflation has continued to cool.
With June’s 1.54% print, inflation as measured by the consumer price index (CPI) has fallen below 2%, the lower end of the MPC’s target range of 2-6%. The central bank has a medium-term target for CPI at 4%.
To be sure, the future inflation trajectory plays a more important role in the MPC’s decision making than previous data points.
According to the June policy minutes, Michael Patra, RBI’s executive director and part of the six-member MPC, had said that the focus must not be on conduct- ing monetary policy by looking at “the rear-view mirror (the most recent inflation prints)” but towards medium-term inflation target.
Most economists say that the inflation readings are unlikely to exceed the medium-term target anytime soon. This is even after considering the reversal of statistical base effect, which had lowered the recent inflation number, and other risk factors such as seasonal uptick in vegetable prices and implementation of housing rent allowance to government employees and goods and services tax are factored in. Separately, risks to inflation are also emanating from the worsening fiscal situation because of farm loan waivers, RBI governor Urjit Patel had warned in June.
Some economists say that it is prudent to wait for these factors to play out rather than going for monetary easing in August.
There is a case to cut interest rates in October, according to Gaurav Kapur, chief economist at IndusInd Bank. By then, there would be a clear picture on the short-term impact of GST introduction on growth and inflation as well the implementation of HRA, especially by state governments. Additionally, there would also be clarity on the surplus liquidity in the banking system, he added.
The central bank is draining out excess liquidity, which had led to falling cost of borrowings for most firms, by conducting open market operations, where it sells government bonds.
The decision making in the MPC is unlikely to be unanimous, going by the minutes of the previous meeting, according to economists.
MPC member Ravindra Dholakia, a professor at Indian Institute of Management, Ahmedabad, had called for a 50 bps cut in repo rate in June. However, he was outvoted by the other five members.
Viral Acharya, RBI deputy governor and member of the ratesetting panel, had also questioned whether a rate cut would really help economic growth at a time of bank balance sheet stress, according to the minutes of the meeting.