RBI Policy: MPC likely to cut policy rate by 25 bps amid concerns of economic slowdown

 RBI Governor Shaktikanta Das said in an interview that the switch to accommodative stance in June policy review amounted to a 25 basis points cut.

 

Monetary Policy Committee (MPC) is expected to deliver a fourth consecutive rate cut of 25 basis points on August 7, amid concerns of a deepening economic slowdown.

Since February, the Reserve Bank of India (RBI) has reduced the repo rate by 75 basis points in three successive reviews. Last month, RBI Governor Shaktikanta Das said in an interview that the switch to accommodative stance in June policy review amounted to a 25 basis points cut, taking the cumulative rate reduction to 100 basis points. Despite Das's comments, markets expect the RBI to continue easing.

"We expect the MPC to cut rates by a further 75 basis points, bringing the cumulative easing in this cycle to 150 basis points, more than the street

expectations," said Tanvee Gupta Jain, Economist, UBS Securities India. She added that the base case was for a 25 basis points cut in August, to be followed with 50 basis points over the rest of the year.

The slowdown in India's auto sector has deepened further with the consumer vehicle segment witnessing sharp decline in July. Ram Venkataramani, president of the Automotive Component Manufacturers Association of India (ACMA) has warned of a million job cuts if the trend continues.

"With the current local and global backdrop, and with obvious constraints on fiscal policy, it is reasonable to expect the current easing cycle to prolong," said Suyash Choudhary, Head – Fixed Income, IDFC AMC. He expects rate cuts of 75 basis points in the cycle, along with measures to ensure positive liquidity.

Last month, the International Monetary Fund also cut its India growth projection by 30 basis points to 7 percent citing weaker-than expected outlook for domestic demand. The IMF also cut its forecast for world economic growth by 10 basis points to 3.2 percent in 2019.

Anagha Deodhar, research analyst, ICICI Securities said that the real interest rates in the economy are high leaving room for further reduction. Currently, real interest rate is 5.2 percent while real policy rate is 2.55 percent. "This level of real interest rate is not conducive for an economy which is experiencing slowdown," Deodhar said.

On August 1, CRISIL ratings revised India's FY20 growth estimate downwards, from 7.1 percent to 6.9 percent, based on factors like weak monsoon, slowing global growth and sluggish high-frequency data for the first quarter.

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