The Monetary Policy Committee of the Reserve Bank of India Thursday held its first meeting for FY’20 and the six-member panel, headed by Governor Shaktikanta Das. There is a strong possibility that the MPC would announce a 25 basis points cut (one basis point is one-hundredth of a per cent), even as a section of the market is rooting for a deeper, 50 basis points cut. In February too, the RBI had cut its repo rate by 25 bps to bring it down to 6.25 per cent from 6.50 per cent earlier.
Why a cut?
The key consideration for the RBI has shifted from inflation to growth and analysts are betting on the lower inflation rate (which is lower than the RBI’s target of 4 per cent) as well as slower growth in the economy to spur the decision to slash rates. In its last policy review in February, the MPC had shifted the monetary policy stance to ‘neutral’ from ‘calibrated tightening’. Economists expect that the panel may signal an ‘accomodative’ stance this time. India Ratings says the current growth-inflation dynamics offers some room for RBI to go for a 25 basis points rate cut and expects the central bank to change its policy stance.
Triggers for a cut
The consumer price index-based inflation has remained within the RBI’s 4 per cent target for over 6 months and is further expected to remain within the indicated range during the next few months. “In addition, subdued domestic economic growth could also prompt the RBI to lower its interest rates,” Care Ratings said in a recent report. As a result, the economy is expected to witness a stable to lower interest rate cycle, given that consumption has slowed down a bit and the investment cycle is still tepid. So a softer interest rate regime will help in boosting both.
For retail consumers, a cut in rates could have a two-pronged impact. For depositors, new deposits will earn a lower rate and thereby lower returns. For borrowers, though, a downward movement of interest rate would bring down the interest outgo in the near future. For floating rate home loans, however, a new rate becomes effective on the reset date of the loan.
Edelweiss Securities says in a tight liquidity scenario transmission of RBI’s rate cuts is likely to be delayed. The central bank’s guidance on easing the current liquidity squeeze would, therefore, be closely watched. Markets would look for the RBI guidance on inflationary expectations. The IMD has indicated at the overhang of the El Nino effect over the Pacific Ocean, which could negatively impact the monsoons. The RBI’s guidance on growth and inflation would be important.