RBI To Further Cut Rates In Next Month's Monetary Policy Review

Economy

The RBI is expected to go for a further rate cut in next month's monetary policy review as inflation is expected to pan out in line with their projection

Written By Press Trust Of India | Mumbai | Updated On:
RBI

The Reserve Bank of India is expected to go for a further rate cut in the next month's monetary policy review as inflation is expected to pan out in line with the Central Bank's projection, experts say. According to global as well as domestic brokerages, moderating inflation, and a negative output gap are likely to open the door for an accommodative monetary policy. According to official data, retail inflation inched up marginally to 3.21 per cent in August from 3.15 per cent in July, mainly due to costlier food items. India's industrial production growth slowed to 4.3 per cent in July, dragged mainly by the manufacturing sector's poor show.

Research reports  

Japanese financial services major Nomura said in a research note that "Contained inflation and a larger negative output gap set the stage for policy easing in October. We expect 40 basis points (cut) cumulatively in Q4," It further said the RBI's FY'20 GDP growth projection of 6.9 per cent "appears too optimistic" and is widely expected to be downgraded at the October 4 policy meeting. According to Bank of America Merrill Lynch, the RBI rate cuts are necessary to bring real lending rates down to incentivize investment. "We believe there is a rising case for a 50-basis points RBI rate cut, on October 4, with August inflation coming in at a lower-than-expected 3.2 per cent," Bank of America Merrill Lynch said in a research note. 

Read: RBI plays down deepening slowdown as just 'cyclical downswing'

Domestic brokerage Kotak Securities in a report said CPI inflation is likely to remain benign in the near term given the weak growth impulses. "We expect the MPC to cut the repo rate by up to 75 basis points through the rest of FY2020including a cut of around 40 basis points in the October policy with focus remaining on transmission," it noted. The RBI, which mainly factors in CPI for arriving at its bi-monthly monetary policy, has been mandated by the government to ensure inflation remains at 4 per cent, with a deviation of 2 per cent on either side. The Central Bank, which has already reduced the key policy rate four times in the current calendar year, is scheduled to announce its next bi-monthly monetary policy on October 4.

Read: Windfall from RBI to give government ammunition to fight the slowdown

Fall in the growth of core sectors in Q1

The growth numbers of various core sectors such as 'Manufacturing', 'Construction', 'Agriculture, Forestry, and Fishing' have taken a heavy beating in the first quarter of FY 2018 - 2019. The Manufacturing sector grew at 0.6%, showcasing almost no growth and decreasing by 11.5% on a YoY basis. Construction grew at 5.7%, falling from 9.6% on a YoY basis. Agriculture, Forestry, and Fishing grew at 2%, as compared to 5.1% on a YoY basis. The Wholesale Price Index (WPI) grew by 6.9%, Private Final Expenditure (PFCE) at Current and Constant Prices is estimated to be 57.7% and 55.1% in FY '19-20 as opposed to 58.7% and 56.1% in '18-19.

The Reserve Bank of India in its annual report said that it was "difficult to diagnose the reason or nature for the slowdown". It said, "The diagnosis is difficult, these conditions are hard to disentangle cleanly, at least in the formative state”

Read: GDP growth falls to 5% for Q1 even as govt announces key measures

Read: RBI selects vendor for developing a mobile app for visually impaired

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