RBI may cut rates for 6th straight time
MUMBAI: The central bank is likely to cut interest rates for the sixth straight time on December 5 despite a surprise spike in inflation, as the Reserve Bank of India (RBI) seeks to reverse a protracted growth slowdown in Asia’s third-largest economy.
Eight out of 10 economists and treasury heads surveyed by Mint expect RBI’s monetary policy committee (MPC) to cut the repo rate, at which RBI lends to banks, by 25 basis points (bps) to 4.9%, while maintaining an accommodative stance. Two expect the RBI to cut rates by 15bps.
Economic growth has slowed to 4.5% in the September quarter, its weakest pace since 2013, despite a cumulative 135bps cut in policy rates this year. Indian banks, saddled with record bad loans, have failed to transmit the rate cuts to borrowers.
Output of capital goods, which indicates investment activity in manufacturing, contracted 20.7% in September against a 6.9% expansion in the year-ago period. After the October MPC meeting, governor Shaktikanta Das said the central bank will maintain its accommodative stance as long as it is necessary to revive growth, even as it ensures that inflation remains within target.
“Completely in line with our
ECONOMISTS EXPECT RBI’S MPC TO CUT THE REPO RATE, AT WHICH RBI LENDS TO BANKS, BY 25BPS TO 4.9%
expectation, GDP in Q2 printed a 26 quarter low with most sectors showing a decline. Core GVA (gross value added) excluding agriculture and government services has printed a low of 3.4%. This further emphatically underscores the need of policy focus shifting to reviving growth. We continue to expect RBI to execute another rate cut in December of 25bps,” Shubhada Rao, chief economist at Yes Bank, said in a research note.
Despite the monetary stimulus thus far and a slew of government measures to boost the economy, economists do not expect an immediate recovery in growth momentum. Non-food credit growth has also slowed to 7.9% from a year earlier in the first week of November from 8.9% in October.
Inflation has also started accelerating with consumer price inflation quickening to 4.62% in October, breaching the 4% target for the first time since July 2018.
In its October policy, RBI projected CPI inflation at 3.5-3.7% for the second half of fiscal year 2019-20 and GDP growth at 6.1%. Many economists expect RBI to revise inflation forecast upwards to 4-4.5% and GDP growth forecast downwards to around 5-5.5% for the current fiscal year.
“We expect RBI to cut the repo rate by 25bps to 4.9% next week (December 5), while downgrading growth and revising higher its inflation projections. We expect incrementally the focus to now shift to government measures on specific sectors and to revitalise the financial sector,” Nomura Global Markets Research said in its recent report.