India Budget 2019: In a pre-budget survey conducted by Financial Express Online, 14 out of 15 experts and economists said that they can see the Reserve Bank of India bringing down monetary policy interest rate this year
India Union Budget 2019 | Financial Express Online Survey: RBI will cut monetary policy interest rates again this fiscal year to prop up economic growth, given its comfort from low inflation, which is persistently keeping below target, according to a survey of economists and analysts. Almost all of the economists and experts that Financial Express Online reached out to, barring one, said that RBI will cut rates again. However, it remains to be seen how much of the RBI policy interest rate cut would be transmitted downstream, ie, whether or not banks decide to pass on the rate cut to the consumers.
In a pre-budget survey conducted by Financial Express Online, 14 out of 15 experts and economists said that they can see the Reserve Bank of India bringing down monetary policy interest rate this year and also suggested ways in which the central bank can ensure that the benefits are passed on. Previously, on 6 June 2019, RBI had cut the repo rate by 25 basis points to 5.75% from the previous rate of 6%. Several banks have since cut their benchmark lending rates by about 10 basis points.
RBI had also noted in its bi-monthly monetary policy on 6 June 2019 that out of the previous cumulative rate cut of 50 basis points, the transmission was limited at 21 basis points for fresh rupee loans.
Why will RBI cut rates?
“Since inflation has remained lower than the RBI’s target and economic growth is lower than potential, it is likely that the RBI will lower rates again,” said Bidisha Ganguly, Chief Economist, CII, told Financial Express Online. Sanjeev Hota, Head of Research, Sharekhan, agreed. “Given the current weakening growth coupled with benign inflation trajectory and overall dovish stance from global central banks, we expect RBI to cut rates further in this fiscal year,” he said.
One more rate cut is likely in the next 3-6 months, Sandeep Raina, Associate Director, Edelweiss Professional Investor Research, said. Further, not just one, but two rate cuts could be possible, said Sachchidanand Shukla, Chief Economist, Mahindra Group. “The space is available for rate cuts. Inflation will cool off from August. At least 2 rate cuts are possible,” Sachchidanand Shukla said.
How much are banks passing on?
There is a potential of 75-100 basis points transmission, ie, banks can reduce their lending rates by that much for a 50 basis points policy rate cut by RBI, since there has been a limited transmission of the previous policy rate cuts, Sachchidanand Shukla, Chief Economist, Mahindra Group, said. “For rate transmission, guidelines are in the offing, of the 50 bps rate cut, only 5 bps has been passed. The transmission needs to be expedited. So while another 50 bps may be cut by RBI, the transmission potential is 75-100 bps,” he said.
How will it trickle down?
To ensure monetary policy rate cut transmission, the government will need to lower interest rates on small savings, Bidisha Ganguly of CII said. RBI must encourage banks to pass on rate cuts, according to D K Srivastava of EY, who said that the problem is that when banks reduce interest rates, deposits go down. “So, the government should come up with some scheme to tackle this dilemma,” he said.
On the other hand, banks have a cost of funds as well, which needs to reduce, said Ranen Banerjee, Partner and Leader Public Finance and Economist, PwC. “The cost of funds have to come down to be able to provide headroom for banks to transmit the rate cuts. Banks compete with small savings for deposits. The small savings rates have to be aligned to the RBI rate actions,” he said. However, CARE Ratings Ltd’s Chief Economist Madan Sabnavis, said that it is already good going by WALR on new loans.
Rescue NBFC from lack of confidence
The government may also need to work on the lack of confidence in NBFCs. “The RBI has to offer solutions to reduce the “trust deficit” for NBFCs, which have emerged as the primary source of credit for several key industries and retail borrowers. Reduction in “trust deficit” alone will help existing liquid conditions to influence the actual cost of borrowings,” said Rupa Rege-Nitsure, Group Chief Economist, L&T Finance Holdings. A large NBFC also said that unless the cost of funds come down for the banks, it will be difficult to ensure transmission. “One way to bring down cost would be to cut CRR by 25 to 50 bps,” it added.
While Yes Bank’s Senior Economist Vivek Kumar said that liquidity should be kept comfortably in the surplus territory, “keep liquidity sufficient to allow lower benchmark rates to translate into lower borrowing costs, said Radhika Rao, Senior VP, Economist, DBS Bank adding that more importantly, the government needs to play its part as well (to scale back budgetary and non-budgetary fundraising).
Not all the experts that Financial Express Online surveyed said that RBI will cut repo rate. “RBI has to consider many factors – global and domestic, and also see how the economy shapes up in the next quarter(s),” said Vikas Vasal, National Leader – Tax, Grant Thornton in India.