Business Economy 03 Oct 2019 RBI likely to cut po ...

RBI likely to cut policy rate on Friday to boost economy

PTI
Published Oct 3, 2019, 5:46 pm IST
Updated Oct 3, 2019, 5:46 pm IST
RBI Governor Shaktikanta Das has already hinted further monetary policy easing while space for fiscal space is limited.
Experts and industry feel low inflation provides enough headroom for the RBI to further lower the policy rate, especially when festive season has just started.
 Experts and industry feel low inflation provides enough headroom for the RBI to further lower the policy rate, especially when festive season has just started.

Mumbai: The Reserve Bank of India is likely to go for yet another rate cut on Friday, the fifth in a row, as inflation is within the comfort zone and the need to boost the economy is pressing.

RBI Governor Shaktikanta Das has already hinted that benign inflation provides room for further monetary policy easing while space for fiscal space is limited.

 

The government has announced a series of measures including steepest cut in corporate tax, rollback of enhanced surcharge on Foreign Portfolio Investors (FPI), among others to jump-start growth which hit a six-year low of 5 per cent during the first quarter of the current fiscal.

The six-member MPC is scheduled to announce the fourth bi-monthly monetary policy for 2019-20 on Friday, after a three-day meeting.

There was no meeting of the panel on October 2 on account of Mahatma Gandhi Jayanti.

The central bank has already slashed repo rate four times consecutively this year amounting to 110 basis points in aggregate.

At its last meeting in August, the Monetary Policy Committee (MPC) reduced the benchmark lending rate by an unusual 35 basis points to 5.40 per cent.

The upcoming MPC meeting comes in the backdrop of RBI's mandate to banks to link their loan products to an external benchmark, like repo rate, for faster transmission of reduction in policy rates to borrowers, from October 1.

Ahead of the meeting, the Das-headed Financial Stability and Development Council (FSDC) sub-committee took stock of the prevailing macroeconomic situation.

Earlier, the RBI Governor had said that the government has little fiscal space, giving hope that the central bank may provide more monetary stimulus to prop up the economy.

The government's fiscal space has been squeezed on account of cut in rates of corporate tax as well as lowering of GST rate on various goods. Revenue collection too has been below the Budget estimates.

Experts are of the opinion that another rate cut is on the cards as the government's hands are tied and the onus of taking initiatives now rests with the central bank.

Shanti Ekambaram, President, Consumer Banking, Kotak Mahindra Bank, said with inflation still within the RBI's medium-term target of 4 per cent, the MPC has the headroom to cut the repo rate further.

"However, the recent volatility in crude oil prices and the fiscal measures announced by the government will have an impact on inflation in the medium term and the fiscal deficit. Hence, we expect the MPC to be more measured in its response with a rate cut of 20-25 basis points in the October policy," she said.

"We continue to expect the RBI MPC to follow RBI Governor into another 'out-of-the-box' 35 basis points repo rate cut on October 4. This should send a strong signal for bank lending rate cuts with the 'busy' industrial season round the corner," BofA Merrill Lynch said in a report.

According to NAREDCO president Niranjan Hiranandani, there is expectation of a further 50 basis points repo rate cut in the backdrop of muted inflation which stands lower than the expected 3.2 per cent.

The further reduction of repo rate will not only bring down the lending rates but also incentivise investment and boost consumption, he said.

While economic activities are showing signs of sluggishness, the policy makers are drawing solace from the fact that retail inflation remains in the comfort zone of the central bank.

Retail inflation inched up to 3.21 per cent in August but remained within the RBI's comfort zone.

The RBI has been mandated by the government to ensure that inflation remains below 4 per cent, with deviation of 2 per cent on either side.

Experts and industry feel low inflation provides enough headroom for the RBI to further lower the policy rate, especially when festive season has just started. People make huge purchases during Navratras and Diwali.

With liquidity concerns in the NBFC sector almost taken care of, the real estate sector too is hopeful that the RBI will go in for the much needed rate cut to boost demand for affordable housing.

...




ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT