Less budget support may push RBI to cut interest rates in FY21; check how much repo rate can be cut

By: |
February 7, 2020 6:14 PM

As the union budget will not be able of much help to uplift the dampened economic sentiments, the Reserve Bank of India (RBI) is likely to cut rates by up to 40 bps in the next fiscal.

RBI, cash reserve ratio, MSME, BSE Realty Index, stress asset funds, commercial real estateRBI’s repo and reverse repo rate is expected to fall by 40bps.

As the union budget will not be able of much help to uplift the dampened economic sentiments, the Reserve Bank of India (RBI) is likely to cut rates by up to 40 bps in the next financial year, said ratings agency Fitch in a report. “We believe that the RBI will resume easing as the FY21 Union Budget will do little to support growth over the near term,” said the report. It further said that they expect the RBI’s repo and reverse repo rate to fall by 40bps to 4.75 per cent and 4.50 per cent, respectively, by the end of next fiscal. According to the report, some easing in inflationary pressures in the forthcoming months will reopen the window for the RBI to once again prioritise growth and ease its interest rates. 

Fitch, in its report, also said that the ongoing episode of high inflation, mainly driven by food prices, will see the central bank take a slight pause on its easing cycle for some time given its mandate to keep inflation between 2-6per cent. “Given our view that high food inflation will gradually fade over the coming months on the back of easing food supply conditions following the winter harvest over Q1 of 2020, this will reopen the window for the RBI to resume its easing cycle to support growth,” the report said.  

According to Fitch, the responsibility of supporting the economy now falls on the RBI as the Union Budget provided little support to growth over the near term. The bank, in its recent monetary policy meeting, has maintained its accommodative stance and noted that the economy continues to be weak and the output gap remains negative. It has also revised its real GDP growth projection for the first half of the financial year 2020-21 to 5.5-6 per cent. It has also projected a growth of 6.2 per cent in Q3 FY21.  Meanwhile, Fitch has forecasted real GDP growth to slow to 5.1 per cent in FY20 from a revised 6.1 per cent. 

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