With heightened risk of deterioration in global growth, the RBI is likely to go for an inter-meeting repo rate cut of 25-40 basis points, says a report.
On Wednesday, the World Health Organization (WHO) officially declared the coronavirus outbreak a pandemic. Following the announcement, the markets took a major hit, with Sensex plummeting 2,919 points.
"Given the evolving macroeconomic situation and deteriorating global backdrop, we believe the risks of an intermeeting cut of 25-40 basis points have increased materially," British brokerage Barclays said in its note.
"Even if the RBI does not make an intermeeting move, we see them cutting by at least 65 basis points by June, with risks biased towards more easing than this," it said.
Before taking a pause in December 2019, the RBI reduced the repo rate by a cumulative 135 basis points since February 2019. The brokerage said inflation has most likely peaked and expectation is that it will trend materially lower in the coming months, back into the CPI band.
RBI has the official mandate of keeping CPI inflation at 4 per cent, with a 2 per cent band. The Consumer Price Index (CPI)-based retail inflation accelerated to 7.59 per cent in January from 7.35 per cent in December 2019.
As such, space for further policy easing is likely to increase, and the RBI will effectively need to decide whether it wants to reduce policy rates, inject more liquidity, continue with unconventional tools such as long term repo operations (LTROs), do targeted lending for SMEs and small businesses, or a combination of all such measures, the note said.
"In light of rapidly deteriorating global sentiment, falling asset prices and possible credit pullback in light of Yes Bank's moratorium, we sense that the RBI will need to reconsider large rate cuts, especially given steeply dropping energy prices, which will ultimately depress inflation in coming months," the brokerage said.
It further said rate cuts would have little impact on near-term activity growth without accompanying steps to keep liquidity conditions ample and possibly increased LTROs or even outright OMOs.