The MPC may consider another round of rate cut to signal its intent to address the increased growth concerns and provide comfort to the volatile markets.
As dark clouds of economic slowdown cast shadows over the household demand and overall consumption, the Reserve Bank of India may further cut the repo rate in its upcoming MPC meet. The Monetary Policy Committee of the RBI is set to meet for three days beginning August 4. The MPC may seriously consider another round of rate cut to signal its intent to address the increased growth concerns and provide comfort to the volatile markets, said Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research. However, he added that it is unlikely that further rate cuts may help much to revive household demand or private consumption expenditure at this juncture.
Aditi Nayar, Principal Economist, ICRA, also expects the MPC to announce a further asymmetric cut of 25 basis points in the repo rate and 35 basis points in the reverse repo rate. After a 250 basis points cut in the last 1.5 years, including 115 basis points cut in the repo rate since the coronavirus pandemic began, the rates are believed to be at the bottom of the cycle. However, the credit growth has remained tepid amid the pandemic; and albeit the transmission is gaining pace, it is not adequate.
Trickling down at snail’s pace
Since February 2019, when the monetary easing phase started, the RBI cut repo rates at seven occasions, cumulatively cutting the rates by 250 bps, but the transmission of rate cuts in terms of a fall in SCBs’ MCLR was only by 110 bps during the same period, said Brickwork Ratings. With the rising inflation outlook and prevailing uncertainty over growth outlook, the Brickwork Ratings further expects the RBI MPC to adopt a wait-and-watch approach and hold the repo rate at 4 per cent and continue with its accommodative monetary policy stance in its upcoming meeting.
Highlighting other options to foster demand, it added that the RBI may use other liquidity tools such as OMOs and LTROs wisely and cautiously so that once the situation normalises and economic activities resume, it has enough armour to help bring the economy back on track and also support the government to manage the restrained fiscal situation. Meanwhile, it is also expected that while the agriculture sector will grow at 3 per cent in the current fiscal, industry and services will face a severe contraction. Acuité Ratings has revised the projected contraction in real GDP to 10 per cent for the current year. Whereas Brickwork Ratings believes that the Indian economy will contract to the tune of 5.5 per cent in the current fiscal.