The RBI is expected to cut its policy rate by 25 basis points, for the fourth time in a row on Wednesday amid an unrelenting slowdown in the economy marked by weak consumption, poor corporate earnings and benign inflation.
Another 25-basis-point cut will take the repo rate to 5.50 per cent. Repo is the rate at which banks borrow funds from the RBI, usually on an overnight basis.
RBI governor Shaktikanta Das had tempered expectations of a rate cut recently when he had said that its accommodative stance was itself equivalent to a 25-basis-point rate cut.
But market circles feel the grim trends in the economy will force the panel to cut rates. Recent data on the economy give clear indicators of a slowdown, which Das and the other members of the monetary policy committee (MPC) need to address.
Data worry
Maruti Suzuki has reported a 36 per cent drop in auto sales in July, while some leading FMCG companies have seen single-digit volume growth.
Growth in the rural markets, which at one point of time was ahead of the urban regions, is now slowing down to be on a par with the cities across multiple indicators.
Moreover, core inflation — the inflation rate excluding food and energy items — has also fallen, reflecting the weak pricing power of producers.
Investor sentiments have taken a beating with the budget proposal on higher surcharge on foreign portfolio investors, resulting in outflows of Rs 2,985 crore in July alone. With headline inflation also remaining below the medium-term target of four per cent, experts feel a 25-basis-point reduction in the repo rate is likely on Wednesday.
“With CPI inflation below the medium-term target, we anticipate another rate cut in August. This will be followed by a pause,” Aditi Nayar, chief economist at Icra, told The Telegraph.
On whether one can expect any liquidity infusing measures, she said the RBI may choose to focus on the faster transmission of monetary policy given systemic liquidity is in ample surplus.
Rate transmission
There has been some good news on the transmission front with a few lenders reducing their benchmark rates. HDFC brought down its retail loan rates by ten basis points, while the Union Bank of India cut its benchmark rate by 20 basis points.
The SBI and PNB have indicated that a rate cut was around the corner when they reduced the deposit rates.
“The third bi-monthly policy meeting is largely expected to deliver a rate cut amid a lower core CPI (consumer price inflation) print and a persistent economic slowdown,” Kunal Shah, fund manager-debt, Kotak Mahindra Life Company, said.
“MPC members are meeting at a time of dire sentiments in corporate India owing to a demand slowdown and pessimism over FPI investors facing surcharge. The global economic activity has been further losing pace,” he said.
The MPC members will take note of the drop in core inflation to 4 per cent, reflecting a slowdown in demand.
“In an ideal case, the MPC could consider a 25-basis-point rate cut to support economic activity. However, a larger cut could be considered to give a fillip to the weak investment sentiments,” he observed.
