RBI seen taking pro-growth stand, experts expect sharp rate cut

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Published: June 3, 2019 8:03:58 PM

Interest Rate: RBI governor Shaktikanta Das is expected to announce a decision about short term benchmark interest rates on Thursday.

RBI, Reserve Bank, Monetary Policy Committee Meeting, RBI Governor, Shaktikanta Das, Interest Rate, Repo RateReserve Bank of India.

RBI Meeting: With the GDP growth rate slipping to a five-year low of 5.8 per cent in five years in January-March period, pressure is mounting on the Reserve Bank to effect a cut in policy rates. While most policy watchers expect a 25 basis point cut, a sharp decline in manufacturing has raised expectations of sharper reduction in Repo Rate.

The Reserve Bank’s Monetary Policy Committee (MPC) meeting that began in Mumbai on Monday will deliberate the sharp fall in the GDP rate, the inflation scenario and the challenges of transmission before a decision is announced by RBI governor Shaktikanta Das on June 6.

“I expect a rate cut of minimum 50 basis points, to revive the economy,” said Charan Singh, CEO of Noida-based economic think tank EGROW Foundation.

“I would like the RBI to adopt a accommodative stance. A major policy announcement can be expected after the Union Budget of July 5 2019,” he said.

Though the Reserve Bank has twice cut the benchmark Repo Rate, the rate at which it lends to other banks to meet their short term requirements, by 25 basis points each in the last four months. However, it has not helped to revive the economy to the extent it was expected. The Index of Industrial Production, a crucial parameter to measure the economic activity in the country has been weak in the last several months.

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The IIP numbers are faltering since November last year, and in the month of April, growth of 8 core sectors registered a y-o-y growth of 2.6% against the 4.7% registered in April last year. These 8 core sectors: crude production, natural gas, refined products, manufacturing, electricity, mining, steel and cement account for over 40% weight in the IIP.

Experts believe that there is enough scope for the RBI to slash the interest rate that will help spur the economy.

“The RBI has significant space to reduce Repo Rate, as the lowest Repo Rate was 6% until June 2018. It was 4.75% between April 2009 and March 2010,” Charan Singh, CEO of EGROW Foundation told Financial Express Online.

At present, the RBI has kept the Repo Rate, the rate at which it lends to banks, at 6%. And the Reverse Repo Rate, the rate which it sucks up excess liquidity from banks, at 5.75%. However, in a country like India, where a significant chunk of economy is still in informal sector, the impact of policy actions by the central bank have limited impact.

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In past, the Reserve Bank has faced transmission issues following its decision to cut rates as banks have not followed it up with the similar rate cuts in their lending operations. Though the Reserve Bank has effected a fifty basis point cut in Repo Rate since February but banks have only cut their rates between 5 to 20 basis points.

In recent past, the RBI has nudging the banks to pass on the benefits of a policy rate cut to ordinary borrowers. A policy rate cut by RBI is generally expected to bring down the interest rates for home loans, auto loans and personal loans among other things, considered crucial for boosting the consumption.

“It is expected that banks will lower their interest rates and spur the economy, Charan Singh told Financial Express Online.

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