Markets are factoring in a rate cut from the Reserve Bank of India, the fourth time this year, as it meets on Tuesday. The policy rate or repo rate will come down 25 bps to 7 per cent, the lowest in four years, if RBI decides to cut rates in its fourth bi–monthly monetary policy review.
But the central bank may surprise the markets by delivering a 50 bps cut. Though most analysts are expecting a 25 bps snip, Arvind Panagariya, vice-chairman, NITI Aayog in a recent interview with CNBC TV 18 had said that the time is ripe for a 50 bps rate cut.
While the central bank has delivered three rate cuts totalling 75 bps since the beginning of the year, it has not been able to pull up credit growth and lending. According to latest figures by the RBI, gross bank credit for July stood at a three-year low of 8.2 per cent.
“This is the most opportune time for RBI to reduce rate of interest to
kick-start investment process in the economy. I am hopeful that credit growth is expected to go up,” said KK Mittal, vice president at investment advisory firm Venus Capital.
“Private investment will only enter at an affordable rate of interest. There is a cautious approach and in case interest rates are coming down, definitely private capital will enter the system and lending will improve,” he added.
With the banks being slow in passing on the rate cuts to the consumers and RBI still wary of rising inflation given the deficient monsoon, the central bank till now has adopted a cautious approach.
But with the inflation down again and the environment more conducive for a cut due to a delay in US Federal Reserve rate hike, the central bank may be willing to go for another rate cut, providing a boost to the economy.
“Earlier, the policy outlook for the second half of the calendar year was clouded by the US Federal Reserve’s rate direction, Chinese yuan-led volatility and the fallout of a weak monsoon. Receding risks on these counts and sufficient domestic catalysts are likely to prod the central bank to lower rates this week,” said Radhika Rao, senior economist at DBS Bank.
Devika Mehndiratta, senior economist at ANZ, resonated a similar view.
“The fact that RBI said further easing would depend on inflation, which has come in lower so far and also that they will be watching uncertainties such as a possible hike by FOMC; so the stage is clear at least for now,” Mehndiratta said.
“I don’t think it is as clear as some are making out to be but there are reasons to lean for a rate cut,” she added.
Although all eyes will be on the rate cut, rating agency Ind-Ra believes that RBI’s commentary will be more critical to assess the future of policy accommodation by the Reserve Bank than the token rate cut of 25 bps.