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Will RBI’s Move to Cut Repo Rate Again Stimulate Economic Growth? Here’s What Experts Say

The Reserve Bank on Wednesday marginally lowered the GDP growth projection for 2019-20 to 6.9 per cent from 7 per cent forecast in the June policy.

- | Reuterstech.ibnlive

Updated:August 7, 2019, 1:30 PM IST
Will RBI’s Move to Cut Repo Rate Again Stimulate Economic Growth? Here’s What Experts Say
A Reserve Bank of India (RBI) logo is seen at the gate of its office in New Delhi. (Reuters Photo)

Bengaluru/Mumbai: The Reserve Bank of India (RBI) cut interest rates by an unconventional 35 basis points on Wednesday, slightly above expectations, and its fourth cut in 2019 to boost an economy growing at its slowest pace in nearly five years.

The RBI maintained its "accommodative" stance but said further rate reductions would depend on the level of inflation.

According to Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, Mumbai, "The 35 bp rate cut should be seen as a signal that the Reserve Bank of India's MPC is quite concerned with the growth outlook beyond the usual 25 bp rate cut in a business-as-usual scenario, even though it does not reflect in the revised FY2020 GDP growth estimate."

Rakshit said the RBI MPC did not necessarily want to deliver a 50 bp rate cut, and hence, retains the scope to reduce rates further. “With inflation expected to remain benign, and further downside to growth outlook, we see scope for 25-50 bp of further rate cuts through FY2020."

He added that transmission to lending rates will likely remain weak unless there is a clear visibility of “adequate liquidity sustaining over the medium-term."

"There has been a significant slowdown in the Indian economy. It was widely expected that the RBI would cut rates to stimulate growth. Further, global interest rates are going down and there is no immediate threat on the inflation front. We welcome this move and hope that rate transmission happens at a faster pace," said Suraj Kaeley, Senior Adviser At Fundsindia.

Joseph Thomas, Head Research, Emkay Wealth Management, Mumbai, said the RBI policy, especially the repo rate cut of 35 bp, takes cognizance of the need to bring down interest cost on liquidity and credit, to support the sluggish economic growth and to stimulate aggregate demand.

"The success of this accommodative policy would depend entirely on the next level of its application, that is, the transmission of lower rates to the ultimate borrowers. The banks seem to be seized of this need and effective cascading of the benefits of lower base rate may happen over the next few months," Thomas said.

"I think deviation from the standard practice of changing rates by 25 bp is welcome. In the current situation, 25 bp would have been insufficient and 50 bp would have been too aggressive. Growth and inflation are expected to pick up modestly in H2FY20. We expect inflation to cross 4% in November 2019. Hence, we could expect only one more rate cut this fiscal," said Anagha Deodhar, economist, ICICI Securities, Mumbai.

Deodhar said banks have already started cutting lending rates. However, the lending rate cuts are much smaller than reduction in repo rate, indicating significant room for transmission.

The RBI has done the maximum that a central bank can do in the current phase of economic slowdown, said Rupa Rege Nitsure, Chief Economist, L&T Financial Holdings, Mumbai, adding that by significantly revising downwards the GDP growth for H1, FY20, it has signalled the concerns on the growth front.

Nitsure added that “the weight of structural factors has increased in India's ongoing slowdown and it is now absolutely essential for the central and state governments to work in partnership to resolve some of the sticky sector-specific issues and concerns."

Welcoming the 35 bp rate cut, Shubhada Rao, Chief Economist, Yes Bank, Mumbai, said that now growth is likely to be revised down further from 6.9%. “Given the well-anchored inflation, we believe that the RBI is set to cut rates in the next policy review in October. It could be 15/20 bps also. It is clear that reviving growth has received most attention."

"The 35 bp rate cut is higher than the consensus and our expectation of a 25 bp rate cut. This clearly shows the RBI's concern about growth performance and outlook, and the urgency to take measures to revive growth," said Sujan Hajra, Chief Economist, Anand Rathi Securities, Mumbai.

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