RBI may opt for 25 bps cut to boost growth: Experts

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The Reserve Bank of India (RBI) is likely to cut policy rates by 25 basis points (bps) on Friday and is expected to continue with the accommodative stance to support the recent government measures like reducing corporate tax to boost economic expansion activity and consumption, experts and economists said on Tuesday.

The RBI’s three-day Monetary Policy Committee (PMC) meeting has started in Mumbai. There is widespread expectation that repo rate, the rate at which RBI lends to banks, will be cut by 25 bps to 5.15 per cent as inflation is still at a controlled range under 4 per cent.

In the August policy, RBI had reduced the repo rate by an unconventional 35 bps from 5.75 per cent to 5.40 per cent. The Monetary Policy Committee (MPC) has already cut rates by 110 bps so far this year in response to slowing growth and moderate inflation.

“The general reading is that MPC might cut repo rate by 25 bps. That’s the expectation on the street. Both RBI and government have taken measures to stimulate consumption and investment and the accommodative policy stance is expected to continue. The bank could be nearing the repo rate of 5 per cent in the days to come. In spite of the rate cut we have not seen a full transmission,” Kaustabh Belapurkar, director, fund research, investment advisory firm Morningstar, told IANS.

“We expect RBI to maintain accommodative monetary stance with a bias towards surplus liquidity and lower real interest rates. We expect the RBI to be pro-growth. We expect MPC to cut repo rate by 25 to 50 bps and maintain accommodative stance”, Nilesh Shah, MD, Kotak Mahindra Asset Management Company, said.

Devendra Kumar Pant, Chief Economist, India Ratings, said “the chances are very high that RBI will go for monetary easing in its current round of monetary policy committee meeting. The reasons are – growth has slumped to 5 per cent, core sector growth contracted 0.5 per cent in August, expectations of weak growth outlook in near to medium term, though the second half is likely to see a better growth mainly because of the base effect… so in view of all these and slowdown, we expect RBI to go for the rate cut. However the extent of rate cut will depend on MPC committee assessment, the impact of the measures announced by the government in recent times and growth. The cut in rates can be anything as 50 bps is considered too much and 35 bps is treated as sufficient, so we can expect any quantum of cut from MPC”.

Pant said that at a time when the income growth is falling, monetary easing is unlikely to give the desired result.

Bank of America Merrill Lynch said in a report that it expects a 35 bps cut followed by 15 bps in December.

“The fiscal stimulus has pushed markets to bring down their terminal repo rate expectations. Nudge to growth intended via corporate tax rate cut can be difficult to come by if G-Sec and thus, lending rates reset higher (or their downward trajectory is hindered). To avoid such an unintended counterproductive impact, we think RBI MPC will continue with their easing bias,” it said.