Mumbai: With growth remaining a dominant concern and inflation remaining benign, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) is likely to cut the benchmark repo rate for the fifth time in a row on Friday. However, economists differ on the quantum of the rate cut ranging from 15 basis points to 50 basis points.
Madhavi Arora, economist, forex and rates at Edelweiss Securities, said, “We are in a state of coordinated monetary and fiscal response. Growth is a dominant concern because the output gap is significant. Inflation does not seem to be a worry in the foreseeable future. As a result, the RBI can have the leeway to cut interest rate by 25 basis point or more. In this rate easing cycle, the terminal rate could reach 5 per cent or a tad lower by the end of FY20.”
It can be noted that the GDP growth has slipped to a six-year low of 5 per cent in the June quarter, which led the government to announce several booster doses. The RBI too has been on a rate cutting spree and has cut the benchmark repo rate four times to the tune of 110 bps since February this year to push economic growth.
Recently, the government announced sharp cuts to corporate tax rates.
Sunil Tirumalai, head of research and strategy at Emkay Global, said, “The tax revenues let go off through this announcement could add to the fiscal strain of the government. We believe this will be offset by: 1) higher disinvestment activity, we pencil Rs1.35 lakh crore versus budgeted Rs1.05 lakh crore, including possible strategic divestments; 2) higher dividends/buybacks by PSUs and 3) as a last resort might lower public expenditure. In spite of these assumptions, we see about 23bps fiscal slippage. This could lead to yields hardening. However, overall, the non-inflationary nature of these actions could still allow the RBI to go for a 50 basis rate cut in October MPC.”
A few days back the RBI governor Shaktikanta Das at an event had indicated that the growth slowdown is back on the RBI’s radar for the upcoming policy meeting. “Today, when we see that the price stability is maintained and inflation is much below 4 percent and is expected to be so in the next 12 months horizon, there’s room for (more) rate cuts, especially when growth has slowed down,” Das had said. He was quick to add that “within this policy framework, the MPC will consider these aspects as well as several other factors and the final decision will be taken in the ensuing MPC meetings in October.”