RBI monetary policy: Repo rate may be cut 40 bps; will actually make loans cheaper this time

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Updated: October 3, 2019 5:02:24 PM

Repo rate cut in tomorrow’s MPC meeting will be the fifth straight cut by the central bank so far this year.

rbi, reserve bank of india, mpc, monetary policy committee, repo rate, interest rate, policy rate, gdp forecast, inflationFurther reduction in the repo rate will make the loans cheaper as many banks have linked the loan account directly with the repo rate.

The Reserve Bank of India looks all set to provide an additional boost to the government’s fiscal measures to revive a sagging economy, by cutting repo rate for the fifth time in a row at its bi-monthly Monetary and Credit Policy Review on Friday. However, this time the expected RBI rate cut will likely make loans cheaper by the same measure almost immediately. Many banks have linked the interest rates on their variable rate loans directly with the repo rate. The RBI is also likely to maintain its stance as ‘accommodative’, as the inflation is still within the RBI’s target range.

At present, the repo rate is 5.4 per cent, down 110 basis points from 6.5 per cent in February 2019 before RBI embarked on a monetary policy easing. Reuters has estimated a rate cut of 25 basis points in tomorrow’s MPC meeting. “Based on the benign inflationary trends and lingering growth concerns, we expect RBI to cut the policy rate,” Care Ratings said in a report, expecting a 25 basis points rate cut.

A report by Kotak Institutional Equities expects the cut to be 40 basis points. Amid inflation remaining within its comfort range forecasts show a sharper-than-usual rate cut in the October policy. “We pencil in a 40 bps of rate cut which should be a signal to the market that the MPC is not quite done as it front-loads the remaining couple of rate cuts in the cycle,” Suvodeep Rakshit, Vice President & Sr Economist, Kotak Institutional Equities.

Further, with the start of the external benchmarked loans in October, a larger rate cut will help in the quicker transmission of rate cuts even as the non-benchmarked loans continue to factor in the past rate cuts, Suvodeep Rakshit added.

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The monetary policy meeting tomorrow may further revise down the GDP forecast due to significantly lower GDP growth in the first quarter of the current fiscal year. The RBI lowered the GDP forecast for 2019-20 from 7 per cent to 6.9 per cent in the last meeting. CARE Ratings expects GDP growth to be in the range of 6.4-6.5 per cent for the fiscal year.

With the continuous cut in the repo rate, the government is trying to boost demand and investment, however, the downturn in the economy has sustained from a long time, registering the six-year low quarterly GDP growth rate of 5 per cent in Q1 FY20.

Concerns relating to asset quality of the wholesale book, liquidity and asset-liability mismatches in the non-banking sector, coupled with slowing economic growth because of sluggish consumption and investment demand, implies that credit quality pressures will take a while to dissipate, said Jitin Makkar, Head-Credit Policy, ICRA.

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