RBI monetary policy panel likely to slash repo rate for sixth time in a row today to revive slowing economy

RBI Governor Shaktikanta Das-headed Monetary Policy Committee (MPC) is expected to cut the key policy rate today (Thursday) in a bid to revive the sagging economy, which has hit a 26-quarter low at 4.5 percent in the second quarter.

Most bankers see Monetary Policy Committee cutting Repo Rate by 25 bps in today’s #RBIPolicy pic.twitter.com/qmeLcb6V3O

— CNBC-TV18 (@CNBCTV18Live) December 5, 2019

If the Reserve Bank of India (RBI) cuts the repo rate on Thursday, it would be the sixth reduction in the short-term lending rate in 2019. In five reductions in 2019 so far, the repo rate has been lowered by a total of 135 basis points over concerns that growth momentum is slowing down and also to try to boost liquidity in the financial system. [caption id=“attachment_5766671” align=“alignleft” width=“380”] File image of RBI governor Shaktikanta Das. Reuters[/caption] The Gross Domestic Product (GDP) growth slowed sharply to more than six-year low of 4.5 percent in the July-September quarter, hit by a slump in manufacturing output, which contracted by 1.0 percent. The pace of GDP growth moderated from 5 percent in April-June and 7 percent in the July-September quarter of 2018. The RBI may cut interest rates again to support growth, bankers and experts said. Apart from this, the industrial production also fell at the fastest pace in over seven years in September, adding to a series of weak indicators that suggested the country’s economic slowdown is deep-rooted and interest rate cuts alone may not be enough to revive growth. The fall in GDP growth rate was despite a slew of new fiscal policy measures, including a large reduction in the base corporate tax rate in a bid to boost private sector investment. The RBI governor had previously stated that interest rates will be cut until growth revives and this gives confidence that policy rates may be reduced at the end of three-day monetary policy review, a banker, wishing not to be identified, said. RBI has cut interest rates on every single occasion the multi-member monetary policy committee has met since Das took over as the governor of RBI in last December. Bankers and experts are of the view that the central bank will go for yet another rate in its fifth bi-monthly MPC meet in the wake of weak economic conditions. A Reuters poll of 70 economists predicted 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 today, and then by another 15 bps in the second quarter of 2020, where it will stay at least until 2021. A 25 bps cut would take the cumulative rate cuts by Asia’s most aggressive central bank to 160 bps since February and will be the most in a calendar year since 2009. Madhavi Arora, economist forex and rates at Edelweiss Securities, said the RBI faced “a tough policy dilemma”, as economic growth was underperforming, inflation was overshooting, and the government lacked fiscal room to manoeuvre. She said the latest GDP numbers supported the view in Edelweiss that the RBI will ease “by at least another 50 bps in this cycle, despite an uptick in inflation beyond the 4 percent comfort zone in the coming months.” Annual retail inflation rose to 4.62 percent last month, climbing above 4 percent for the first time in 15 months and up from 3.99 percent in September. Analysts believe transient factors were to blame, so the central bank still had room to continue cutting rates. “With the RBI Monetary Policy Committee having decided to retain an accommodative stance following its October rate cut, further rate cuts are possible if economic conditions remain weak,” said Rajiv Biswas, Asia Pacific chief economist at IHS Markit. The fall in GDP growth rate was despite a slew of new fiscal policy measures including a large reduction in the base corporate tax rate in a bid to boost private sector investment. Rumki Majumdar, economist, Deloitte India said inflation is low and is expected to remain so because of the excess capacity in the economy. “This gives the RBI the elbow room to cut rates, which is highly anticipated in the upcoming December meeting.” In doing so, RBI may look past the recent uptick in inflation last month, largely attributed to vegetables such as onions. But importantly, there has been a slide in core inflation. Motilal Oswal Financial Services Ltd chief economist Nikhil Gupta said: “We are afraid that expectations of better growth in 3QFY20 (October-December) may not pan out. Leading indicators suggest that October (festival month) was the worst in the current cycle. We believe that growth could weaken further to around 4 percent in 3QFY20, which will mark the trough.” “Our full-year growth forecast, thus, is revised down from 5.7 percent earlier to 4.5 percent for FY20,” he said. Ranen Banerjee, Leader Public Finance and Economics, PwC India, said the second-quarter GDP numbers made it more imperative for a fiscal led priming as the monetary policy interventions clearly are not transmitting. “Thus, just to depend on another rate cut by RBI in the upcoming MPC meeting may not be sufficient. The situation demands a coordinated fiscal priming on areas with higher multipliers and where spends could be immediately combined with a monetary policy push to address the effective transmission of rate cuts to the NBFCs. Effect of rural demand uptick on Q3 numbers will be crucial to avert a sub 5 percent annual growth rate,” Banerjee said. Sreejith Balasubramanian, Economist - Fund Management, IDFC AMC said bottoming-out of growth could be further down the road and recovery is unlikely to be V-shaped as consumer demand, credit supply and risk appetite remain lacklustre. “This and the falling core-CPI should allow the RBI focus more on growth, while a major fiscal stimulus is hindered by the lack of available household financial savings,” he said. Rate cuts alone are however expected to do little to revive growth and calls for more direct fiscal stimulus have grown in recent weeks. A significant minority of economists — 24 of 56 — who answered an additional question in the poll said rate cuts would marginally boost the economy, while nearly a third said they would have little or no impact.   — With inputs from agencies