RBI Policy: 25 bps rate cut likely, transmission key

Given that the domestic and global economic growth momentum has slowed further and inflation risks are not on the horizon, the monetary policy committee (MPC) is all set to give a minimum of 25 basis point rate cut today but the markets may be looking for the RBI's stance on maintaining the liquidity in the banking system to facilitate the transmission of rate reduction.

So, all eyes will be on whether the central bank relaxes its stance from the current neutral to “accommodative”. An accommodative stance means a central bank will cut rates to inject money into the financial system whenever needed.

The consensus view on the street is that the MPC will go for a 25 basis point cut in the policy repo rate to bring it a multi-year low of 5.75%. Some economists even believe that the cut could be deeper than 25 bps and may extend upto 50 bps.

State Bank of India economists and brokerage Motilal Oswal are among the camp who believes that the cut could be bolder than 25 bps.

But there are yet another set of analysts who believe that the MPC will refrain from doing any 'heavy lifting' in the wake of risks of a fiscal slippage looming large this year when the government starts implementing its poll promises.

However, weak economic growth numbers in 2018-19 and a 45-year high unemployment rate may prompt the MPC to give the third consecutive cut today to propel the sagging economy.

RBI Governor Shaktikanta Das is an ex-bureaucrat and has said in so many words that he would like to give economic growth a priority when inflation is under control. He has given two back-to-back rate cuts this year and has also suggested that cuts could be bolder if economy demands so.

He had recently proposed that the central banks move away from the conventional cuts of 25 bps or multiples of that to 35 bps or thereabouts.

On the transmission part, however, the Governor will have to think out of box solutions. Transmission is a perennial problem with the banks and until their cost of deposit comes down, they would not be able to transmit the rate cuts to consumers.