RBI may cut rate by 25 bps to spur economic activity

Mumbai: Subdued economic activity, still benign inflation, soft global growth and a dovish US Federal Reserve may prompt the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) to cut the repo rate by 25 basis points on April 4. Repo rate is the rate at which RBI lends to commercial banks.

The MPC will meet from April 2 to 4 for the first bi-monthly policy statement for 2019-20, the central bank said in a release on Monday.

The headline Consumer Price Index Inflation (CPI) came in at 2.6 per cent for February and according to most economists is likely to remain below RBI's medium term target of 4 per cent. On the other hand the IIP growth for January was 1.7 per cent. Lower growth in manufacturing was expected due to high base effect, lower production due to higher stocks built up in Q2 for Q3 where demand did not materialize fully due to lower rural demand.

In the last policy in February, the RBI had changed its stance to "Neutral" and cut repo rate by 25 basis points.

Goldman Sachs economists Prachi Mishra and Andrew Tilton in their report said, "We now expect the RBI to reduce policy rates by 25 bps in April (instead of a hold in our last published forecast). Our change in view relies on the three reasons discussed above: (i) soft growth momentum, (ii) still benign inflation, and (iii) a favourable global environment with a patient Fed."

"We expect another cut by 25 bps in Q3 2019. We anticipate the RBI to move back to a tightening mode in 2020, as growth picks up and our inflation forecasts start inching up above the RBI's 4 per cent target," said Mishra and Tilton.

Karthik Srinivasan, group head, financial sector ratings at ICRA said, "We expect a 25 basis points rate cut. However unlike the unanimous vote on the last cut in repo rate during February 2019, the rate cut this time is expected to be divided. Some MPC members may vote for status quo given the various populist announcements being made in run-up to the general elections and more clarity on the outcome of monsoons, which will decide the future course of inflation."

Meanwhile on the global front, growth continues to be soft while oil prices are higher by 8.5 per cent relative to the last RBI MPC meeting. Growth concerns and low inflation prompted the US Federal Reserve to keep policy rates unchanged at 2.25-2.5 per cent through the course of 2019 and also fade the balance sheet contraction which would also provide the RBI the headroom to cut rates.

Since the RBI's rate cut in February, banks have transmitted the February rate cut to only a limited extent and are not willing to cut lending rates as deposits and household financial savings are at historical lows. Only 8 banks have cut the marginal cost of lending rate (MCLR) by 5-10 bps so far.