The policy rate or repo rate will come down 25 bps to 7 per cent, the lowest in four years, if RBI decides to cut rates in its fourth bi-monthly monetary policy review.
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According to Sonal Varma of Nomura Research, the RBI will deliver a final 25-bps rate cut at its September 29 policy meeting and to adopt neutral to mildly hawkish forward guidance as it shifts its CPI inflation goalpost to an intermediate target of 5% by Q12017. An even larger rate cut in India could thus be risky.
“Beyond that, any room to ease monetary policy further would only become available if government action lifts potential growth and if there is visibility on a sustained disinflation, which requires lowering households’ inflation expectations“, the report said.
But with the inflation down again and the environment more conducive for a cut due to a delay in US Federal Reserve rate hike, the central bank may be willing to go for another rate cut, providing a boost to the economy.
CARE also cites the wearing off of a favourable base effect, the Fed factor, currency volatility and negative portfolio investments as supporting reasons for a status-quo. “The biggest challenge before us now is to ensure revival of demand in the domestic market in the context of different uncertainties world is showing”, Das said, while adding that the revival hinges on “investment-driven” inflows rather than government spending.
While, the step of cutting down the interest rate would be done with the aim of spurring the economic recovery and alleviate the China’s slowing impact on India.
Fourth, under the agreement signed between the RBI and government in February this year, the central bank has to hold inflation below 6 percent by January 2016 and reduce it further to below 4 percent by January 2018. “I am confident we will be able to maintain it with all these additional expenditures”, Finance minister Arun Jaitley said at an event organized by Cogencis here.
The first quarter GDP print of 7 per cent was below market expectations while industrial output growth in April-July came in at 3.5 per cent.
Major lenders like the State Bank of India also expect RBI to lower the repo rate.
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There is a possibility of 0.25 per cent rate cut by the RBI, Union Bank of India Chairman & MD Arun Tiwari said. The point is that these rate cuts haven’t fully translated into lower interest rates for the end-consumer since banks have cracked balance sheets and capital scarcity.
