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Thursday, May 28, 2020

RBI may cut interest rates by 40 basis points in FY21: Fitch Solutions

The RBI held its benchmark repurchase (repo) and reverse repo during its February 6 monetary policy meeting at 5.15 per cent and 4.90 per cent respectively.

By: PTI | New Delhi | Published: February 7, 2020 5:51:11 pm
RBI, unsolicited offers, fake calls, cyber crime, fake bank calls, phishing, bank scam, indian express news A likely easing in inflationary pressures in the forthcoming months will reopen the window for the RBI to once again prioritise growth and ease its interest rates.

With Union Budget doing little to support growth in the near term, the Reserve Bank of India (RBI) is likely to cut benchmark interest rates by 40 basis points before the end of 2020-21 fiscal, Fitch Solutions said Friday.

The RBI held its benchmark repurchase (repo) and reverse repo during its February 6 monetary policy meeting at 5.15 per cent and 4.90 per cent respectively.

“High current inflation is likely causing the RBI to take a slight pause to its easing cycle, given their mandate to keep inflation below 6 per cent,” Fitch Solutions said in a commentary on RBI’s February 6 decision.

A likely easing in inflationary pressures in the forthcoming months will reopen the window for the RBI to once again prioritise growth and ease its interest rates.

“We believe that the RBI will resume easing as the FY2020/21 (April–March) Union Budget will do little to support growth over the near term,” it said. “We at Fitch Solutions maintain our forecast for the RBI’s repo and reverse repo rate to fall by 40bps to 4.75 per cent and 4.50 per cent, respectively, by the end of FY2020/21 (April-March).”

It said the ongoing episode of high inflation, mainly driven by food prices, will see the central bank take a slight pause on its easing cycle, given its mandate to keep inflation between 2.0-6.0 per cent.

“Given our view that high food inflation will gradually fade over the coming months on the back of easing food supply conditions following the winter harvest over Q1 of 2020, this will reopen the window for the RBI to resume its easing cycle to support growth,” it added.

Fitch Solutions said it believes that the onus of supporting the economy has now fallen on the RBI after the 2020-21 Union Budget provided little support to growth over the near term, a view that contrasts with that of RBI.

The RBI maintained its accommodative stance at its February monetary policy meeting. The Monetary Policy Committee (MPC) noted that the economy continues to be weak and the output gap remains negative.

While some high-frequency indicators such as tractor and three-wheeler sales, domestic air passenger traffic, and railway freight traffic point towards a recovery in economic activity, the MPC noted a need to continue monitoring incoming data to gauge the sustainability of the recovery.

It highlighted its expectations for supportive rural and infrastructure spending in the 2020/21 Budget and the corporate tax cuts in September 2019 to boost growth over the medium term.

However, the RBI revised down its real GDP growth projection for the first half of FY2020-21 to 5.5-6.0 per cent (from 5.9-6.3% during the December 2019 statement) and projects growth of 6.2 per cent in the third quarter of FY2020/21.

With inflation surging to over 7 per cent in December 2019 on the back of a spike in onion prices, RBI revised its H1FY2020/21 inflation projection up to 5.0-5.4% (from 3.8-4.0% in the December 2019 statement).

“A weak economic growth outlook will spur further monetary easing from the RBI,” Fitch Solutions said. “We forecast real GDP growth to slow to 5.1 per cent in FY2019/20, from a revised 6.1 per cent (down from 6.8 per cent previously) in FY2018/19.”

Stating that there may be a slight recovery over the second half of the fiscal year, it said a gradual feed through of income from the winter crop should support a recovery in consumption, with high existing food prices due to a previously poor summer crop harvest providing some support to farmer incomes.

“Monetary policy transmission, while showing signs of improvement, remains weak and this will likely necessitate further easing for loan growth to register a meaningful pick-up,” it said.

“We believe that the weak economic outlook would bode poorly for debt repayment which, considering the existing high non-performing loans, particularly in the public sector banks which we estimate to have a net non-performing loan ratio above 5 per cent, will make interest rates downward sticky.”

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