DBS expects modest rate cut at RBI's MPC meeting in October after corporate tax rate cut

  • The central bank is likely to watch these developments closely as risk-free rates rise, Rao said

  • The new effective rate takes India closer to its regional peers, on par with China, South Korea, Indonesia and OECD average

  • These changes come as a positive surprise and are intended at breaking the cycle of weak sentiments and subdued economic activity

Singapore: The Reserve Bank of India's monetary policy panel will go for a modest rate cut at the October meeting following the corporate tax rate cut announced by the government, Singapore's DBS Bank has said.

"With this fiscal boost focused on investment revival and not consumption (hence not inflationary), we reckon that the RBI monetary policy committee (MPC) might proceed with a modest cut at the October MPC," the bank's economist Radhika Rao wrote in a commentary on the Indian economy on Monday.

"(RBI) Governor Shaktikanta Das also reinforced his dovish bias due to weak inflation and negative output gap," Rao noted in the report on the Indian government's corporate tax rate cuts.

 DBS expects modest rate cut at RBIs MPC meeting in October after corporate tax rate cut

Representational image. Reuters.

The central bank is likely to watch these developments closely as risk-free rates rise, Rao said, adding that the equity markets surged on Friday, while risk-free yields ticked up.

On 20 September, Finance Minister Nirmala Sitharaman announced to cut the basic corporate tax rate for domestic companies to 22 percent from 30 percent. The effective tax rate for domestic companies was reduced to 25.17 percent from 34.94 percent inclusive of surcharge and cess.

Also, new manufacturing companies starting production on or before 31 March 2023 and incorporated on or after 1 October 2019 will have an option to pay tax at a lower rate of 15 percent if they do not avail any exemption/incentive.

The effective tax rate for such companies will be 17.01 percent, inclusive of surcharge and cess.

The new effective rate takes India closer to its regional peers, on par with China, South Korea, Indonesia (announced an upcoming cut to 20 percent) and OECD average, the report said.

These changes come as a positive surprise and are intended at breaking the cycle of weak sentiments and subdued economic activity.

"Concomitantly, we are mindful that the government will also make some savings on the exemptions that companies were previously availing of and henceforth will have to scale back, if they wish to enjoy lower tax rates. We assume here that these savings have been accounted for in the fiscal cost estimate provided by the finance ministry," said Rao.

The government will require to scale back expenditure in the second half of the year to keep the overall deficit near 3.5-3.6 percent of GDP, the report said.

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Updated Date: Sep 23, 2019 15:56:11 IST