DH Poll: 25 bps rate cut on cards at MPC

DH Poll: 25 bps rate cut on cards at MPC

The Reserve Bank of India (RBI). Reuters file photo

The Reserve Bank of India (RBI), in its first Monetary Policy Committee (MPC) meeting of the fiscal is likely to cut the repo rate cut by 25 basis points (bps), along with the lowering of growth targets, a DH poll of economists showed.

Of the 16 top economists polled by DH across the country, all of them said that the RBI will go ahead with the rate cut on the back of benign inflation and growth not picking up. 

The central bank, on Tuesday, began its three-day monetary policy committee (MPC) meeting -- the first in 2019-20. Earlier, in its February meeting, the MPC had thrown a surprise by reducing the repo rate by 25 bps to 6.25%, despite apprehensions from two MPC members, including deputy governor Viral Acharya.

Despite the rate cut, which banking industry sources suggest was done with the aim to increase the credit flow to the economy in the build-up to the general elections, the rate cut benefits haven't been fully transmitted to the consumers. According to the analysts, the banks have not been able to transmit the rate cut benefits due to lack of funds. Post IL&FS crisis, Indian banks have been consistently borrowing more from the RBI's repo facility for six months than depositing, due to the dearth of funds.

However, with a further 25 bps cut at the ongoing MPC meet, RBI hopes to push the banks for cut in interest rate.

"Going forward, in 2020, as growth accelerates, headline inflation begins to pick up, and Fed begins to increase rates, we expect pressure to build on the RBI to shift back to a tightening mode. Taking these factors into account, we still expect the RBI to increase rates next year - one hike of 25 bps each in Q1 and Q2 2020," Prachi Mishra, India Economist at Goldman Sachs said.

Core inflation remained high at an average of 5.7% during Dec 2017 to Feb 2019 and is likely to stay elevated for some time. The sharp increase in inflation in health and education has been attributed as the primary reason for that.

"Moreover, currently, demand push inflationary pressures remain benign. The slowdown in GDP (Q3 FY19) is particularly led by the sharp moderation in the government and private sector consumption," Arun Kumar, Lead Economist, Dun & Bradstreet said.

Most economists that DH spoke to also suggested that the apex bank would revise its GDP estimates to 6.9% for the fiscal year 2018-19. In its February meeting, the central bank hadn't revised the growth estimates for FY19 at 7.4%. "It looks difficult that government will achieve even 6.8% growth in 2018-19," said Govinda Rao, Member 14th Finance Commission.

However, economists believe that growth recovery is on cards. "Growth is slowing, but our analysis suggests that it is likely to rise back to its 7% potential rate after the election, leaving little need for policy easing," Pranjul Bhandari, Chief Economist, India, HSBC said.