Analysts believe Reserve Bank of India will cut rates in June, but split on if it should: Poll

The Reserve Bank of India delivered rate cuts at its previous two meetings, in February and April.

Press Trust of India May 29, 2019 12:09:46 IST
Analysts believe Reserve Bank of India will cut rates in June, but split on if it should: Poll
  • Under Governor Shaktikanta Das, the central bank delivered rate cuts at its previous two meetings

  • Two-thirds of 66 economists predicted the RBI to cut its repo rate by 25 basis points at its 4-6 June meeting

  • The last time the central bank cut rates three times in a row was in 2013

Bengaluru: The Reserve Bank of India (RBI) will cut interest rates at a third consecutive meeting in June, according to a Reuters poll of economists who were split over whether it should.

Under Governor Shaktikanta Das, who took over as RBI governor from Urjit Patel in December last year, the central bank delivered rate cuts at its previous two meetings, in February and April.

That was in the run-up to a national election in which Prime Minister Narendra Modi’s government increased its majority.

Two-thirds of 66 economists predicted the RBI to cut its repo rate by 25 basis points at its 4-6 June meeting, bringing it to 5.75 percent—the lowest since July 2010. It is then expected to keep policy on hold at least until the end of next year.

The last time the central bank cut rates three times in a row was in 2013.

Analysts believe Reserve Bank of India will cut rates in June but split on if it should Poll

Representational image. Reuters.

The latest Reuters poll results, taken 23-28 May, were significantly different from a poll conducted just a month ago, where economists expected the RBI to hold rates at the current 6.00 percent until at least October 2020.

“Further interest rate cuts in India look only a matter of time after headline inflation in April came in below target,” said Shilan Shah, senior India economist at Capital Economics. “However, we think that monetary loosening is a policy mistake, as we expect underlying inflation to rise again soon.”

While retail inflation was below the central bank’s mid-term target of 4 percent for the ninth consecutive month in April, it is expected to breach that level in the final quarter of 2019, a separate Reuters poll showed.

Of the nearly 60 contributors who had a view on RBI rate policy this year, just under half had rate forecasts ready for 2020. A majority of that sample said rates will be on hold until the end of next year after a cut next month.

However, when asked what the RBI should do this year, rather than what it would do, economists were split, with 19 contributors saying it should hold rates and 18 saying it should ease. Only one economist said it should raise rates.

“We expect the RBI to provide policy support to enhance liquidity in the system, including to non-bank beneficiaries. This will likely help arrest further deterioration in growth momentum,” noted Sanjay Mathur, chief economist Southeast Asia and India at ANZ.

The median forecast in the latest Reuters poll showed the economy was expected to have grown 6.3 percent in the January-March quarter, the slowest annualised pace in nearly two years.

If that is correct, India will lose its title as the fastest-growing major economy for the first time in one-and-a-half years. China’s economy expanded 6.4 percent during the same period.

Forecasts ranged from 5.7 percent to 7.4 percent. Only a handful of economists, six of 51, expect a faster pace than the 6.6 percent reported for the previous quarter.

However, slowing growth and subdued inflation are probably not the only reasons for further policy easing, according to some economists.

“The independence (of the RBI) was already compromised late last year. Going by the government pressure, we might get a rate cut again. There is more than 50 percent probability of that kind of outcome,” said Prakash Sakpal, Asia economist at ING.

Nearly three-quarters of 39 economists who answered a separate question said the RBI’s independence would remain unchanged over the coming months. Eight said it would be somewhat diminished and two said it would be somewhat enhanced.

Updated Date:

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