RBI to go in for a minimum 25 basis points cut in forthcoming monetary policy review? Here is what experts opine

According to experts, the Reserve Bank of India (RBI) is likely to go in for a minimum 25 basis points cut in key lending rate in the forthcoming monetary policy review as the need to revive the coronavirus-hit economy is pressing notwithstanding marginal uptick in inflation, as per a report in PTI. The Monetary Policy Committee (MPC), headed by RBI Governor, is scheduled to meet for three days beginning August 4 and announce its decision on August 6.

The central bank has been taking steps proactively to limit the damage to the economy caused by the outbreak of COVID-19 pandemic and subsequent lockdowns to prevent the spread of the disease.

A fast-changing macroeconomic environment and deteriorating outlook for growth necessitated off-cycle meetings of the MPC first in March and then again in May 2020.

The MPC cumulatively cut the policy repo rate by 115 basis points over these two meetings.

Higher prices of food items especially meat, fish, cereals and pulses pushed the retail inflation based on Consumer Price Index (CPI) to 6.09 per cent in June. The government has tasked the RBI to keep inflation at 4 per cent (+, - 2 per cent). The central bank mainly factors in CPI while arriving at its monetary policy.

Several agencies, including the central bank expects India's GDP growth to remain in negative zone as the spread of coronavirus and subsequent lockdown has severely impacted economic activities. Now with the process of unclock underway, government officials claim economic activities have started picking up. 

"We anticipate a further asymmetric cut of 25 basis points in the Repo Rate and 35 basis points in the Reverse Repo Rate, in a split decision from the MPC," opined Aditi Nayar, Principal Economist, ICRA. Nayar said further said although the retail (CPI) inflation has exceeded the MPC's target range of 2-6 per cent for three consecutive months in the lockdown and initial unlock period, it is expected to recede within this range by August 2020.

Expressing similar views, Union Bank of India managing director and CEO Rajkiran Rai said, "There is a possibility of a 25 basis points cut or they may hold on (the rate)."

Industry chamber Assocham, however, wants the RBI to focus more on loan restructuring given the problems being faced by the industry.

"Industry requires an urgent restructuring of loans across all the sectors to avert large scale defaults. As is clear from the latest RBI report, restructuring is imperative both for the banks and borrowers. The restructuring of the loan should be amongst the main priority of the monetary policy committee," said Assocham Secretary General Deepak Sood.