Monetary policy: Here's how low interest rates can go after 5 cuts in a row

At 4.75%, India will still offer positive rates of return to investors seeking high yields

How much lower can India’s central bank drive interest rates after delivering five back-to-back cuts? By as much as 65 basis points, say some economists.

The Monetary Policy Committee can possibly cut rates by another 40-65 basis points, which will take the benchmark repurchase rate below the 4.75 per cent level seen during the global financial crisis, according to economists, including Anand Rathi Financial Services Ltd.s’ Sujan Hajra. So entrenched is India’s growth slowdown that it may require the rate to be cut to as low as 4.5 per cent for any meaningful impact.

“We now expect that rather than 5 per cent, the repo rate in this cycle would bottom out at 4.5 per cent,” said Hajra, chief economist at Anand Rathi and an ex-central banker himself.

The Reserve Bank of India Friday slashed the full-year growth forecast to 6.1 per cent — which would be a seven-year low — from 6.9 per cent previously. Governor Shaktikanta Das, echoing Mario Draghi, vowed to keep the policy stance dovish for “as long as it is necessary to revive growth.”

Das was less forthcoming on how low rates can drop, after having cut rates by a cumulative 135 basis points so far this year.

“On a potential policy rate lower bound we have not said anything,” he told reporters on Friday. “This is a kind of forward guidance that as long as growth momentum remains as it is and till growth is revived, the RBI will remain in an accommodative mode.”

Rahul Bajoria, senior India economist with Barclays Bank Plc, said Das’s guidance was “unambiguously dovish.” He expects the RBI to reduce the repo rate by another 25 basis points in December and by a further 15 basis points in February. That will “bring the terminal rate to 4.75 per cent.”

At 4.75 per cent, India will still offer positive rates of return to investors seeking high yields, with inflation at 3.2 per cent and well below the RBI’s medium-term target of 4 per cent.