RBI MPC Meet on June 6: Is a Big Rate Cut Coming? Here's What to Expect

The Reserve Bank of India (RBI) is expected to announce a jumbo rate cut of between 25 and 75 basis points on June 6, as per some reports. This comes amidst the low Gross Domestic Product (GDP) growth rate and low inflation looming in the Indian Economy.

The current repo rate is 6.00 per cent. It is the rate at which commercial banks can take loans from the RBI.

RBI MPC Meet - Rate Cut Prediction

While several sources predict rate cuts in the upcoming monetary policy announcement, they also predict that rate cuts will be observed in August and October (the upcoming monetary policy meetings).

Morgan Stanley reported a rate cut of 100 basis points (bps) in their easing cycle to revive and stimulate the economy. It also reported two more rate cuts following June in August and October of 25 bps.

The report stated, “We expect the RBI to respond with a deeper easing cycle, premised on slower growth, while inflation remains under control.”

A Reuters poll consisting of economists predicted between May 19th to May 28th a repo rate of 5.75 per cent (25 bps cut) for the upcoming June 6th announcement. A strong majority of more than 85 per cent (53 of 61) of respondents predict this drop. Two respondents predict a 50 basis points cut while six expect no change.

For the upcoming forecast in August, more than 80 per cent (47 of 58) of economists predict the rate at 5.50 per cent. Earlier, only 50 per cent of the respondents agreed to this estimate. This highlights the expectation of an expansionary monetary policy in the current scenario amidst changing economic conditions in India.

SBI Research predicted ‘jumbo rate’ cuts over the upcoming months of June, August and October. June and August would see rate cuts of 75 bps, and October of 50 bps. The cumulative rate cuts are expected to linger around 125 bps.

In their report, they stated, “We feel, jumbo cuts of 50 bps could be more effective than secular 25 bps tranches spread over the horizon,” amidst the low inflation rates. They deemed it to be a “goldilocks period” because it was the right time to execute such jumbo cuts.

Rate Cut? Reasons

Earlier in May, when April’s Consumer Price Index (CPI) and Wholesale Price Index (WPI) data were released, it was observed that the inflation rates had fallen.

The month-on-month inflation from March to April fell to 3.16 per cent. Food inflation was the major contributing factor to the dip in the CPI basket.

The global economy is expected to slow down. The global market uncertainty and trade-tariff tensions brought by the United States of America (USA) have created an extremely volatile situation. These circumstances have had an impact on India’s growth rate, slowing it down to 6.3 percent.

"The global risks we are facing in terms of trade tensions are downside risks to global growth and, hence, to India's growth," said Dhiraj Nim, an economist at ANZ and one of the few looking for two more cuts after an expected June 6 reduction, to Reuters.

Amidst the low inflation and growth rate, the monetary policy will be aligned with stimulating activity such as investment and consumption.

These rate cuts will lead to lower corporate borrowing costs, which will, in turn, make investment opportunities more attractive in the country. Paired with this, the increased consumer spending due to more disposable income and employment opportunities due to investment should boost economic growth.

Currency depreciation is a possibility, but the lower costs of Indian exports would make it competitive in the global market. The trade tensions will hinder competitiveness despite depreciation.

How Do Policy Rate Cuts Impact You?

When policy rates are cut, consumers tend to get cheaper loans: home, personal and car loans all get cheaper. The cost of your Equated Monthly Instalment (EMI) will also be reduced during this period. But a flip side to this is that returns received on savings and fixed deposits (FD) reduce.

While returns may be lower on fixed deposits, the returns earned in the equity market (stocks) increase due to cheaper corporate borrowing, improved valuation and increased consumer spending.

Are Policy Rate Cuts Effective?

Questions regarding whether the policy rate cuts would stimulate the economy, leading to more investment, employment, and better economic conditions, loom over our heads.

The Chief Economist of Yes Bank, Indranil Pan, said to Reuters, “The February rate cut did not translate into much easing in lending rates by banks due to tight liquidity.”

Regarding this, ANI reported that the RBI is expected to utilise other instruments, such as OMOs and macroprudential easing, to facilitate economic growth through credit expansion.

Monetary policies are not the main parameters to support an economy through hard times. Fiscal Policies are necessary to stimulate economic growth. Monetary policies without fiscal backing would not support the economy the way it is intended to.

The Government of India (GOI) has announced plans for fiscal consolidation in its Union Budget.

Read More: Government Brings Back Export Duty Remission Scheme Effective June 1