The central bank has slashed the repo rate four times by 110 bps to 5.40 per cent in this calendar year so far, with the last being an unconventional 35 bps reduction on August 7.
RBI may cut rates for the fifth time in a row so far this year with inflation remaining low and growth rate declining, experts said. The August retail inflation reading at 3.21 per cent which is under RBI’s comfort zone of 4 per cent gives it the headroom to cut rates to boost growth, they added. The central bank has slashed the repo rate four times by 110 bps to 5.40 per cent in this calendar year so far, with the last being an unconventional 35 bps reduction on August 7. “Based on our forecasts of inflation and growth trajectory, the space for additional monetary easing appears to be 25 bps, which we anticipate would be undertaken in the October 2019 MPC review,” said Aditi Nayar, Principal Economist, ICRA told Financial Express Online. However, structural issues around land acquisition and high corporate debt levels may reduce the impact of rate cut by the monetary policy committee (MPC), she noted.
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On September 19, RBI Governor Shaktikanta Das hinted there could be more reduction in the rate in the near future. The comments come at a time when the economy recorded dismal growth of 5 per cent in the first quarter of FY20. Several sectors in the economy such as automobile and FMCG are seeing degrowth on account of lack of demand.
“Yes, I believe RBI will cut rates by 25 bps but not 40 bps. The reason for the same is that rates do not come down much when the fiscal is expanding as a result of the corporate rate cut. In case the cut was 40 bps, then market may perceive that we are at the end of the rate cycle. If RBI goes for a big rate cut one may not see the transmission of the same easily,” Abhimanyu Sofat, VP Research, IIFL told Financial Express Online.
“We think there is a rising possibility for a 50-bp cut on October 4, with our BofAML India Activity still pointing to a slowdown for another quarter. Our US economists are expecting another 50-bp Fed cut by December,” Merril Lynch said.