Will RBI go for a rate cut on Aug 6? Here's what experts say
The Big Question
With RBI's money policy review slated for next week, the big question is will the MPC cut rates or not. The arguments are flowing in from both sides but it remains to be seen on which side the central bank would sway. Till then, here is a look at what some of the top economists and analysts are anticipating.
Sudhakar Shanbhag, Kotak Mahindra Life Insurance
For April, May and June - all together, markets had assumed inflation to be in the 5-6% range, but it came in higher, in the 6-7.5% range, well above RBI’s 4% target. Incorporating this, inflation is likely to average 5% in FY21, versus earlier expectations of 4%. After cutting rates by 115 bps over two consecutive policy meetings, RBI will pause in the August 6 review. It may revise up its inflation forecast for the year. Having said that, due to growth slowdown, it is expected to hold on to an accommodative stance and continue to keep domestic liquidity at surplus. If activity remains subdued and the seasonal spike in vegetable prices reverses over the next few months, the RBI is likely to cut rates later during the year.
Rahul Bajoria, Chief Economist, Barclays
High inflation has added confusion to the Reserve Bank's policy outlook, but given state of aggregate demand, we forecast the RBI will continue easing, by cutting the repo rate at least 25bp at this policy review. When thinking of how much policy support is enough, historical lessons can be useful. In 2009, when RBI chose to stop its easing cycle in April, RBI Governor Duvvuri Subbarao stated that his first priority remained arresting the decline in GDP growth. Through the peak crisis period between September 2008 and March 2009, the RBI injected Rs 3.9 trillion (7% of GDP), lowered the reverse repo rate (the operating rate) to 3.25%, and provided ample liquidity in both the foreign exchange and money markets.
Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank
The recent high inflation readings has made the rate cut call a close one, however, we continue to see 25 bps of further easing in August followed by a pause. Previously also the MPC has eased rates in anticipation that inflation will remain benign in the 2HFY21 and that an immediate upside in retail inflation may be temporary. Hence, 1QFY21 high retail inflation should not hold the MPC back from delivering whatever little scope is left. We expect RBI would continue to provide the policy response required to address the demand shock and financial market dislocations through other liquidity and regulatory measures. RBI may look to widen the policy corridor to 75 bps by easing reverse repo by a higher quantum.
Kapil Gupta, Economist, Edelweiss Research
In the forthcoming monetary policy review, we expect the MPC to cut rates by 25bps. This is because: a) Growth remains weak, India’s unlocking is slow and RBI’s own prognosis indicates rising asset quality stress. Thus, growth revival should be policy priority, as is the case around the world. b) Headline inflation, while currently above RBI’s projected trajectory, has probably peaked out. It should move towards 4% or below by December 2020. Also, RBI should look through the temporary spike in inflation as it is being driven by covid-19-related supply disruption rather than strong pricing power/wages (which are actually worsening).
Shanti Ekambaram, President – Consumer Banking, Kotak Bank
The cumulative 155 basis points rate cuts since February this year have had little impact on demand stimulation or growth. The COVID-19 pandemic is hurting both businesses and consumers alike and the uncertainty around when things will normalize has led to lacklustre and muted demand and supply disruptions. Having frontloaded the rate cuts and with inflation still above the 6% mark, the MPC may decide to wait and watch and take a pause this time to monitor India’s progress in its fight against the virus – both from a health and economic point of view. The MPC could then possibly cut the policy rate by a further 25 bps in the policy meeting at the end of September, which is traditionally India’s busy season.
Mandar Pitale, Head - Treasury, SBM Bank India
There is a significant likelihood of MPC members voting for a pause during the forthcoming review. Extent of frontloaded easing already carried out and lingering immediate uncertainty about inflation trajectory for next couple of months may weigh the rate decision. The upside inflation surprise suggests that headline inflation is likely to remain near the upper end of the RBI’s inflation mandate. MPC may preserve some space in future when situation starts returning to normalcy and the fiscal and monetary boost measures start generating impacts to ease further to encourage the growth. There is still a small probability for a cut in Reverse Repo rate acting as signaling rate at present.