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Business News » India News

RBI may consider 25 bps cut again in H1: Report

The Reserve Bank of India could consider another 25 bps cut in 1HFY20 to address the domestic growth concerns, said a report from Kotak Economic Research. Monetary Policy Committee (MPC) would meet six times during 2019-20 and the first meeting was held on April 2. 

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RBI may consider 25 bps cut again in H1: Report
On the 25 bps rate cut in April, the report said the MPC minutes have restated caution on growth and reiterated the need to address growth after the objective of low and durable inflation has been achieved. Image source: Reuters
Written By: IANS
Updated: Tue, Apr 23, 2019
07:34 am
IANS
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The Reserve Bank of India could consider another 25 bps cut in 1HFY20 to address the domestic growth concerns, said a report from Kotak Economic Research. Monetary Policy Committee (MPC) would meet six times during 2019-20 and the first meeting was held on April 2.  According to the schedule provided by the RBI, the second meeting in the current fiscal will be held on June 3, 4 and 6; third from August 5-7; fourth meeting October 1, 3 and 4; fifth meeting December 3-5 and sixth meeting February 4-6, 2020.

"MPC is likely to cut rate by 25 bps in 1HFY20. In sync with the policy statement, the minutes of the MPC also reaffirm our belief that the MPC might consider another 25 bps cut in 1HFY20 to address the domestic growth concerns," the report said.

"Even though food prices have started firming up, the headline CPI inflation remains well within the RBI`s target of 4 per cent. Our trajectory for inflation, however, is slightly higher than that of MPC`s as we expect inflation to inch above 4 per cent from November as against MPC`s projection of 3.5-3.8 per cent for 2HFY20. We assign a higher probability of a rate cut in August as uncertainties surrounding the outcome of election, monsoon and budget would have partly abated by then." 

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On the 25 bps rate cut in April, the report said the MPC minutes have restated caution on growth and reiterated the need to address growth after the objective of low and durable inflation has been achieved. 

There were, however, some concerns about fiscal slippages and a sharp reversal in inflation due to a weak monsoon. "We continue to see room for another 25 bps of rate cut in 1HFY20 on the back of a benign growth-inflation mix. However, uncertainties surrounding the outcomes of election, monsoons and budget should restrain the MPC from cutting the repo rate in June," the report added.

The report further drew the conclusion that benign inflation and weakening growth led the MPC to cut rates. "Fading growth momentum and sharp downward surprises to inflation readings prompted the MPC to deliver the second consecutive rate cut in April. While all except Dr Ghate and Dr Acharya had voted for a rate cut, the decision to keep policy stance at `neutral` was more unanimous with only Dr Dholakia voting for an `accommodative` stance.

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"The minutes also suggested that Dr Ghate and Dr Acharya might reassess their views depending on the incoming growth-inflation data. Expectations of a benign food inflation and moderation in inflation expectations also led the MPC to revise down the inflation trajectory by 30-40 bps through FY2020. A common concern across most MPC members remained growth, which was also revised down to 7.2 per cent, with RBI Governor Shaktikanta Das noting the need to act `decisively` to address the challenge of sustained growth while ensuring price stability," stated the Kotak Report. 

"Deputy Governor of RBI Dr Viral Acharya and external member (Indian Statistical Institute) professor Chetan Ghate continued to differ from the rest of the MPC with respect to their assessment about growth. Ghate felt that sub-7 per cent growth rates were `confined possibly to just two quarters`. 

"Additionally, Dr Acharya noted that the finance neutral output gap remained closed and that improved capacity utilization augured well for future investment. With respect to inflation, certain MPC members including Dr Patra believed that food prices may not remain low for very long. The fiscal response to deal with agrarian distress could also lead to a revival in inflation, in addition to the risks from an unfavourable monsoon, elevated core inflation and fiscal slippages," the report said. 

Shaktikanta Das, Viral Acharya differed in approach as the the 6-member MPC decided to reduce the policy repo rate by 25 basis points to 6 per cent in a 4-2 majority decision.

 

 

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