Even before the Reserve Bank of India Monetary Policy Committee meeting tomorrow, we all know that a 25 bps rate cut is expected from the board given the poor state of economy and demand slowdown. But, will this rate cut suffice for the upcoming quarters? Most brokerages and analysts believe that some more rate cuts will be imminent to balance the ballooning economy.
This CY19, the RBI lowered repo rate by a cumulative 135 bps so far to 5.15 percent, lowest in 9 years. If MPC cuts repo rate tomorrow then it will be the sixth cut this year so far.
Here’s why the RBI may initiate more repo rate cuts
Q2 GDP growth slumped to 4.5 percent, over 6-year low after the economy felt pangs of the liquidity crisis, poor earnings, demand slowdown amongst other reasons.
In fact, a Reuters poll of 70 economists predicted that the RBI would cut its repo rate by 25 basis points (bps) to 4.90 percent when the monetary policy committee's decision is announced on Thursday, and then by another 15 bps in the second quarter of 2020, where it will stay at least until 2021.
Speaking on the same lines, Edelweiss in its report said that the RBI is expected to cut rates by 25 bps but it remains prescriptive of more.
“GSEC yields higher than Nominal GDP will have high debt servicing implications with the relative cost of capital already being too high. The current GDP growth at 4.5 percent falls much below the RBI’s estimate of potential output of 8 percent and also below India’s trend growth at 6.7 percent,” it added.
In the last policy meeting, the MPC pledged to maintain the accommodative stance until growth revives while ensuring that inflation remains within control. Considering the recent inflation rise to 4.6 percent due to uptick in vegetable prices, the scope of a rate cut is intact because these numbers show clear signs of demand slowdown, the report said.
Meanwhile, Nirmal Bang believes that India is slipping deeper into a recession, and may well be staring at the longest slowdown in a decade.
The brokerage expects the RBI to cut 25 bps given no signs of a turnaround. However, it also does not rule out further easing, particularly if global central banks continue to cut rates.
Despite 5 rate cuts this year, the Finance Ministry has not been able to uplift the sentiment of the economy, and since the RBI governor had previously stated that interest rates will be cut until growth revives, it is thus expected that the central bank could come up with a couple more rate cuts next year.
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