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RBI May Cut Interest Rates Again on December 5 to Support Growth

RBI has cut interest rates on every single occasion the multi-member monetary policy committee MPC has met since Shaktikanta Das took over as the Governor of RBI in last December.

PTI

Updated:December 1, 2019, 2:32 PM IST
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RBI May Cut Interest Rates Again on December 5 to Support Growth
Representative image.

New Delhi: The Reserve Bank may cut interest rates for the sixth straight time on December 5 to support growth that has continued to slip to more than six-year low on slump in manufacturing, bankers and experts said.

RBI has cut interest rates on every single occasion the multi-member monetary policy committee (MPC) has met since Shaktikanta Das took over as the Governor of RBI in last December.

In five reductions so far in 2019, interest rates have been lowered by a total of 135 basis points over concerns that growth momentum is slowing down and also to try to boost liquidity in the financial system.

GDP growth slowed sharply to a pace of 4.5 per cent in the July-September, hit by a slump in manufacturing output, which contracted by 1.0 per cent. The pace of GDP growth has moderated from the 5 per cent rate in April-June and 7 per cent in July-September quarter of 2018.

Das had previously stated that interest rates will reduce until growth revives and this gives confidence that interest rates may be reduced at the end of three-day monetary policy review beginning December 3, a banker, wishing not to be identified, said.

"With the RBI Monetary Policy Committee having decided to retain an accommodative stance following its October rate cut, further rate cuts are possible if economic conditions remain weak," said Rajiv Biswas, Asia Pacific Chief Economist at IHS Markit.

The fall in GDP growth rate was despite a slew of new fiscal policy measures including a large reduction in the base corporate tax rate in a bid to boost private sector investment.

Rumki Majumdar, Economist, Deloitte India said inflation is low and is expected to remain so because of the excess capacity in the economy. "This gives the RBI the elbow room to cut rates, which is highly anticipated in the upcoming December meeting."

In doing so, RBI may look past the recent uptick in inflation last month, largely attributed to vegetables such as onions. But importantly, there has been a slide in core inflation.

Motilal Oswal Financial Services Ltd chief economist Nikhil Gupta said: "We are afraid that expectations of better growth in 3QFY20 (October-December) may not pan out. Leading indicators suggest that October (festival month) was the worst in the current cycle. We believe that growth could weaken further to around 4 per cent in 3QFY20, which will mark the trough."

"Our full-year growth forecast, thus, is revised down from 5.7 per cent earlier to 4.5 per cent for FY20," he said.

Ranen Banerjee, Leader Public Finance and Economics, PwC India, said the second quarter GDP numbers made it more imperative for a fiscal led priming as the monetary policy interventions clearly are not transmitting.

"Thus, just to depend on another rate cut by RBI in the upcoming MPC meeting may not be sufficient. The situation demands a coordinated fiscal priming on areas with higher multipliers and where spends could be immediate combined with a monetary policy push to address the effective transmission of rate cuts to the NBFCs. Effect of rural demand uptick on Q3 numbers will be crucial to avert a sub 5 per cent annual growth rate," Banerjee said.

Sreejith Balasubramanian, Economist - Fund Management, IDFC AMC said bottoming-out of growth could be further down the road and recovery is unlikely to be V-shaped as consumer demand, credit supply and risk appetite remain lacklustre.

"This and the falling core-CPI should allow the RBI focus more on growth, while a major fiscal stimulus is hindered by the lack of available household financial savings," he said.

Rajni Thakur, Economist, RBL Bank said the growth in the second half of the year could remain evasive unless government pumps in more stimulus and continues to heavy lift growth push through the fiscal year.

"The grind up is going to be slow and heavily dependent on fiscal support to come out of current growth recession."

Majumdar said aggressive asset sales and privatisation reforms will give the government some fiscal space to incur counter-cyclical fiscal policies to boost growth without widening the fiscal deficit.

"Confronted with the sharp slowdown in economic growth momentum, the Indian government should give a high priority to implementing additional measures to bolster manufacturing output and kick-start an upturn in the investment cycle.

"Accelerated government spending on infrastructure projects such as roads, railways and ports, as well as urban infrastructure such as affordable housing and hospitals, are the type of fiscal policy measures that could help to revive economic growth momentum within a relatively short timeframe," Biswas said.

While the RBI has been helping through its monetary policy easing measures, the impact is likely to be more protracted, since monetary policy stimulus effects on the real economy generally act with long lags, he said.

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