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Third straight RBI rate cut seen as economy cools

At its last policy meeting, the central bank cut its GDP forecast for the current fiscal year to 7.2% from 7.4%. Still, the reading depends on how the crucial monsoon season pans out.

By: Bloomberg | Updated: June 6, 2019 7:57:55 am
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The Reserve Bank of India is likely to cement its position as Asia’s most dovish central bank with a third straight interest-rate cut Thursday.

The six-member monetary policy committee led by Governor Shaktikanta Das will reduce the repurchase rate by 25 basis points to 5.75% on Thursday, say 31 of 43 economists surveyed by Bloomberg, while three are penciling in a 50 basis points cut. The RBI may also switch its stance to accommodative from neutral, given that expectations are growing for the Federal Reserve to slash rates this year.

Inflation that’s stayed close to the lower end of RBI’s 2-6% band for six months has given policy makers room to support economic growth. India is among central banks across Asia shifting to looser monetary policy to boost their economies amid risks from the U.S.-China trade war. Philippines, Malaysia and New Zealand eased last month, while Australia cut interest rates this week for the first time in almost three years.

The policy decision will be announced at 11:45 a.m. in Mumbai, followed by a press conference 15 minutes later by Das. Here’s a look at what else to watch out for in the decision that comes weeks before the new government’s annual budget on July 5:

Subdued Growth
Gross domestic product growth slowed to a five-year low of 5.8% in the first three months of the year. Investment has been subdued and early indicators from auto sales to air travel show consumption — which contributes more than 60% to GDP — has waned amid a crisis in the shadow banking sector that’s curbed lending.

At its last policy meeting, the central bank cut its GDP forecast for the current fiscal year to 7.2% from 7.4%. Still, the reading depends on how the crucial monsoon season pans out. For now, the southwest monsoon, which waters more than half of India’s farmland between June and September, is expected to bring normal rainfall.

Economists have already trimmed GDP forecasts to 7.1% for fiscal 2020 in the latest Bloomberg survey from 7.2% previously.

“The muted growth seals the case for more rate cuts,” said Upasna Bhardwaj, an economist at Kotak Mahindra Bank Ltd. in Mumbai. “We maintain our expectation of 25 basis point rate cuts in June and August —- though an outside chance of a 50 basis-point rate cut in June itself could build up.”

Benign Inflation
With growth slowing and inflation expected to remain below the RBI’s 4% medium-term target in 2019, the central bank has room to cut. Underlying inflation, which strips out volatile fuel and food prices, has eased since November and economists expect it to move toward the headline rate in the coming months.

Policymakers might choose to gloss over a recent uptick in food costs, given record grain stocks and declining oil prices.

Policy Stance
Apart from its likely rate cut, the RBI will have to tackle issues surrounding sluggish monetary policy transmission. Despite lowering rates by 50 basis points this year, bank lending costs have been rather sticky amid tighter liquidity. Those conditions, though, are showing nascent signs of easing.

“We think that rate cuts need to be accompanied by sustained injections of durable liquidity into the economy,” said Kapil Gupta, an economist at Edelweiss Securities Ltd. in Mumbai. “We also see a good chance of the policy stance shifting to accommodative/dovish from neutral currently.”

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