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RBI faces calls to do more than just one rate cut amid economic slowdown

Finance Minister Nirmala Sitharaman has ratcheted up pressure on the six-member monetary policy committee for a 'significant cut' to lift economic growth from a five-year low

Liquidity management tool: RBI may have to balance old norms with the new

India's central bank is poised to deliver its fourth successive quarter-point interest rate cut on Wednesday, amid calls from investors and the government for further easing as a slowdown gripping the economy becomes more pervasive. 

The Reserve Bank of India will lower the benchmark repurchase rate by 25 basis points to 5.5 per cent, according to almost all of the 36 economists surveyed by Bloomberg. Swap markets are pricing in at least another 50 basis points of reductions before the end of 2019.

Finance Minister Nirmala Sitharaman has ratcheted up pressure on the six-member monetary policy committee for a "significant cut" to lift economic growth from a five-year low. Inflation that's stayed below the central bank's 4 per cent medium-term target for 11 months in a row and the Federal Reserve's first rate cut since the financial crisis allows room to retain the policy makers' easing bias. 


A quarter-point cut will take the benchmark rate to the lowest since April 2010. With price pressures anchored, the central bank may have the leeway to keep rates lower for longer.
 
"We expect 75 basis points of additional rate cuts spread over August, the fourth quarter of 2019 and the first quarter of 2020, taking the repo rate to 5 per cent by March 2020," said Pranjul Bhandari, chief India economist at HSBC Holdings Plc in Mumbai. The headline inflation will stay below the RBI's medium-term target for the "foreseeable future" due to a lack of underlying price pressures across sectors, she said. 

Data dependent

Policy action will be data-dependent, RBI Governor Shaktikanta Das said in an interview last month, while suggesting that the MPC has already delivered 100 basis points worth of easing as he equated a switch to an accommodative stance to a 25 basis-point cut. Incoming data also doesn't show any momentum in the economy. 

A slew of high-frequency indicators -- from sliding car sales to a contraction in exports and imports of goods -- suggest the economy is yet to recover from a dismal performance in the first three months of this year, when growth slumped to a five-year low of 5.8 per cent. 

An uncertain monsoon is adding to worries about rural consumption and wages, while rising unemployment and the aftermath of a shadow bank crisis is weighing on consumer sentiment in urban India. That's pulling down capital expenditure by companies too.


According to the Center for Monitoring Indian Economy, capital spending on new projects was Rs 0.69 trillion ($9.8 billion) in the June quarter, down from Rs 2.44 trillion in March and Rs 2.51 trillion in the December quarter. 

The deteriorating macro picture is pushing the swap market to price in more than two rate cuts for the rest of 2019, according to IDFC Asset Management Co. "This is consistent with a macro view of slowing growth and subdued inflation, especially as fiscal policy has prudently refrained from any counter-cyclical stimulus," Suyash Choudhary, head of fixed income at IDFC Asset, said.

Yields have declined by 51 basis points in July, the most since November 2016, as the government surprised markets by lowering its budget deficit target and announced plans to shift some of the borrowings offshore. The overseas bond sale has been mired in controversy, but overall the trend for domestic borrowing and lending rates has been lower.


"While the cost of capital is headed lower, we believe further moves will be in baby steps, driven by lowering of inflation expectations, a global recession notwithstanding," said Teresa John, an economist at Nirmal Bang Equities Ltd. "We expect a pause after a 25 basis points rate cut in August, with further rate cuts of about 50 basis points likely in early FY21," she added.