A rate cut is almost certain in the October 4 monetary policy review to lift economic growth, expect economists and market participants at large, but the quantum varies from 15 basis points (bps) to 40 bps. One of the 15 participants polled even predicts a pause. Economists, however, differ on whether there will be room for further cuts, especially after the recent tax breaks given to the corporate sector, which is expected to create demand and boost growth.
Besides, there is a nagging discomfort that the banking system has not really passed on the 110-bp rate cut since February to the customers, except perhaps for retail customers.
Economists also say the present repo rate of 5.40 per cent should be adjusted back to the traditional system of multiples of 25 bps, after the unconventional cut of 35 bps in the August policy. So, at least in one leg, either in the October policy or thereafter, the central bank needs to cut the repo rate by 15 bps or 40 bps to make the cut at 50 bps or 75 bps.
“The cumulative space for rate cuts is 40 bps. Therefore, depending on the size of cut in October, there is some more space, though limited,” said Gaurav Kapur, chief economist at IndusInd Bank. He expects a rate cut of 15-25 bps.
“There is a demonstrated sense of urgency on the part of policymakers to boost growth. Also, inflationary pressures remain limited. Thus, we continue to see a scope for further monetary easing in the coming months, including 35-40 bp repo rate cut in October,” said Siddhartha Sanyal, chief economist and head of research, Bandhan Bank.
Inflation, on the other hand, is likely to remain below the target of 4 per cent, say economists, in part due to subdued core inflation, and despite likely food price pressures due to erratic monsoon-induced supply disruptions.
“We expect a 25-bp reduction in the repo rate in the October policy meet. Given the weak demand level in economic activity, we expect the MPC (Monetary Policy Committee) to maintain its accommodative stance and expect the repo rate at 4.75 per cent by FY21,” said Anubhuti Sahay, chief economist at Standard Chartered Bank. Kaushik Das, chief economist at Deutsche Bank, also holds a similar view. State Bank of India’s group chief economic advisor, Soumya Kanti Ghosh, on the other hand, expects a 40-bp cut on October 4 itself. “Beyond a rate cut, we now firmly believe that a counter-cyclical policy response such as tax cuts by the government is a much better option than aggressive rate cuts against a jump in household leverage in recent years,” Ghosh said.
He advised that rates should be good enough for the interest of the depositors, particularly senior citizens who have no formal social security support.
Soumyajit Niyogi, associate director of India Ratings and Research expects a pause. “Amid the weakening of growth environment, interest rate elasticity falls more. Let's allow the fiscal policy arrest such propositions at first, before the next cut happens. Room will be available at least 40 bps, but more important is ensuring sustainability of the overall rate regime at such level,” Niyogi said.
Even as there is room for a further 35-40 bps cut in the fiscal year, Rupa Rege Nitsure, chief economist at the L&T Finance group, wondered “if this will have any material impact on reversing the slowdown.”
“The magnitude of financial and real sector disruption is large and current economic issues cannot be resolved completely by cyclical stimulus measures,” Nitsure said, adding, “Sector-specific corrective measures are needed to address sticky structural issues like a sharp decline in the savings and private investment rates and lingering weakness in financial credit and business competitiveness.”
The bond market, though, will be keenly watching the fiscal equations. Yields are already up, fearing extra borrowings. And that should also weigh on the minds of the MPC.
“The RBI and the MPC will still be willing to cut rates even beyond October -- however, much will depend on how data evolves. We could see a spike in inflation from November onwards, and the questions about the quality and extent of the fiscal balance will also persist,” said Ananth Narayan, associate professor at SP Jain Institute of Management.
Harihar Krishnamurthy, head of treasury at First Rand Bank, said there could be a 25-bp cut in October, and a further 15 bps at some point if the inflation and borrowing calendar remains within limit.
“As of now, we expect the fiscal deficit at 3.5 per cent of GDP. Hence, a 25-bp cut in October will be followed by another 15-bp cut in the repo rate in December,” said Sameer Narang, chief economist at Bank of Baroda.
There is, though, a real possibility that the RBI may want to frontload its rate cuts in October and pause after that.
“Given the continued sluggishness in growth, benign inflation, and global conditions, we still see room for further accommodation. We expect 40 bps of rate cut in October, with probability of further rate cuts getting minimised post the corporate tax cuts,” said Upasna Bhardwaj, chief economist of Kotak Mahindra Bank.