RBI likely to go for sixth straight cut in interest rates

RBI has cut interest rates on every single occasion the multi-member monetary policy committee (MPC) has met since Shaktikanta Das took over as the Governor of RBI in last December. In five reductions so far in 2019, interest rates have been lowered by a total of 135 basis points over concerns that growth momentum is slowing down and also to try to boost liquidity in the financial system.

GDP growth slowed sharply to a pace of 4.5 per cent in the July-September, hit by a slump in manufacturing output, which contracted by 1.0 per cent. The pace of GDP growth has moderated from the 5 per cent rate in April-June and 7 per cent in July-September quarter of 2018. Das had previously stated that interest rates will reduce until growth revives and this gives confidence that interest rates may be reduced at the end of three-day monetary policy review beginning December 3, a banker, wishing not to be identified, said.

“With the RBI Monetary Policy Committee having decided to retain an accommodative stance following its October rate cut, further rate cuts are possible if economic conditions remain weak,” said Rajiv Biswas, Asia Pacific Chief Economist at IHS Markit. The fall in GDP growth rate was despite a slew of new fiscal policy measures including a large reduction in the base corporate tax rate in a bid to boost private sector investment.

Rumki Majumdar, Economist, Deloitte India said inflation is low and is expected to remain so because of the excess capacity in the economy. “This gives the RBI the elbow room to cut rates, which is highly anticipated in the upcoming December meeting.” In doing so, RBI may look past the recent uptick in inflation last month, largely attributed to vegetables such as onions. But importantly, there has been a slide in core inflation.

Motilal Oswal Financial Services Ltd chief economist Nikhil Gupta said: “We are afraid that expectations of better growth in 3QFY20 (October-December) may not pan out. Leading indicators suggest that October (festival month) was the worst in the current cycle. We believe that growth could weaken further to around 4 per cent in 3QFY20, which will mark the trough.” “Our full-year growth forecast, thus, is revised down from 5.7 per cent earlier to 4.5 per cent for FY20,” he said.

PTI

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