RBI Seen Cutting Rate Again To Arrest Falling Growth

With GDP growth sinking to a six-and-a-half year low of 4.5 per cent in the second quarter of FY2020, the Reserve Bank of India is expected to cut the repo rate by 25 basis points to revive the moribund economy.

Economy watchers, however, say the RBI has already done its part, cutting the policy repo rate cumulatively by 135 basis points in the last nine months, and now it is for the government to do some heavy lifting to spur economic growth.

Though the retail inflation breached the RBI’s comfort zone of 4 per cent in October, touching a 16 month high of 4.62 per cent against 3.99 per cent in the preceding month and 3.38 per cent in October 2018, experts believe the central bank will cut rate, again, to address growth concerns.

In the last bi-monthly monetary policy review, the repo rate, which is the interest rate at which banks borrow from the RBI to overcome short-term liquidity mismatches, was cut by 25 basis points (bps) from 5.40 per cent to 5.15 per cent, the lowest in nine years.

The three-day meeting of the six-member rate-setting Monetary Policy Committee (MPC) is scheduled to start on December 3 and its decision will be announced on December 5.

Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, said: “It still remains to be seen whether we (GDP growth) have bottomed out. Going forward, the incremental move up in Q3 (October-December) will be minimal, while Q4 (January-March) as of now will largely be a base effect!”

Ghosh expects the RBI to cut rates by 25 basis points, but the Government must spend and ensure that fiscal policy does not act as a drag on the economy. He said that a rate-cut when consumer leverage is increasing will not help demand and only by using fiscal policy as a counter cyclical stabiliser will help improve the situation.

At its last meeting, the MPC felt that the continuing slowdown warrants intensified efforts to restore the growth momentum. “Recent measures announced by the Government are likely to help strengthen private consumption and spur private investment activity... the MPC decided to reduce the policy rate by 25 basis points and continue with the accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target,” the committee said.

The RBI also sharply cut the real GDP growth projection for 2019-20 from 6.9 per cent in the August policy to 6.1 per cent in October. The GDP growth rate in the first and second quarter of FY2020 was 5 per cent and 4.5 per cent, respectively. Economists put the growth for FY20 at around 5.5 per cent against 6.8 per cent in FY2019.