RBI likely to cut rates despite inflation risk:
Reviving growth by boosting demand could take precedence over the inflation target.
Our economy is going through a worse phase and might continue in the coming months. As coronavirus numbers are getting wider and wider because of it people are expecting a rate cut. However, we do not think so.
About 15-20% of economists in a Reuters poll expect the Reserve Bank of India (RBI) to cut the repo rate by another 25 basis points (bps) on Aug. 6 and some more Repo Cut can be expected in the next quarters.
“High inflation has added more confusion in the minds of Reserve Bank's, but given the state of aggregate demand, we forecast the RBI will continue easing,” said Rahul Bajoria, an economist at Barclays who expects a 25-bp cut.
Annual retail inflation increased in June to 6.09% from 5.84% in March, remaining above the RBI's medium-term target range of 2%-6%.
In recent times the RBI's policies have focused on financial stability and the need to support growth despite the price target.
The country was under one of the strictest lockdowns in the world starting from March for over two months to stop the spread of the coronavirus. The government gradually eased restrictions in June, July, and some relief in Aug although infections continue to rise.
As per the poll results, analysts are thinking that the economy to contract by 20% in the June quarter versus the April forecast of a 5.2% fall and remain in negative terrain until the December quarter.
For this fiscal year, the economy is likely to fall up to 5.1%, which would be its weakest performance in the last 40 years, a sharp contrast to the 1.5% expansion forecast in April. Which is something already expected because of lockdown in the entire country.
Leaving the rate cuts apart, some economists are expecting RBI to focus on liquidity and regulatory measures to address demand shocks and financial market dislocations.
“RBI may think of widening the policy corridor to 75 bps by easing reverse repo by a higher quantum,” she said, adding that though they expect a 25-bp rate cut, it may not be effective in the current environment.
In this year the RBI has already reduced the repo rate by a total of 115 basis points since February, on top of the 135 basis points in an easing cycle last year, from 6.50%, forecasting the slowing growth.
There are A few economists, who feels it may be prudent for the RBI to pause in August before resuming its rate-cutting cycle once inflation has stabilized.
As per the DBS economist, Radhika RaoWeakness in growth versus above-target inflation, improving indicators, and concerns over inflation expectations will put the RBI in a tough spot.
“It will be a very close call,.” The talks will go aside in the next few hours as the RBI policies are going to announced. I believe everyone is at the edge of their seats.
I do not think RBI is going to do many changes. However, never know let's wait and watch.
