Dalal Street expects another 25 bps RBI rate cut: Poll
Since January, the RBI has cut the repo rate by 135 basis points.
Gross Domestic Product (GDP) expanded at its slowest pace in more than six years, at 4.5 per cent in the second quarter of the financial year, data showed last week.
“I expect RBI to give predominance to the decelerating aggregate demand conditions,” said B Prasanna, head of global markets at ICICI Bank. “Accommodative forward guidance is critical for the transmission mechanism to work its way through the bond markets.” The repo, or the rate at which banks borrow from the central bank for the near term, is now at 5.15 per cent.
“The focus will be largely on transmissions rather than simply cutting rates,” said Abheek Barua, chief economist at HDFC Bank. “The endeavour could be linking more floating rate loans to the benchmark rate. Money market rates, too, are softening in line with policy actions.”
Since January, the RBI has cut the repo rate by 135 basis points. This compares with only a 40 bps fall in the Marginal Cost of Fundsbased Lending Rate (MCLR) of banks, since RBI governor Shaktikanta Das took charge. A basis point is 0.01 percentage point.
“Real lending rate adjusted for core wholesale inflation is shooting up, which could prompt RBI to slash rates further,” said Indranil Sen Gupta, India economist at Bank of America. “This is one of the main factors hurting growth. The real MCLR of banks has surged 120 bps since March this year.”
Consumer prices have, of late, showed signs of picking up. The retail inflation gauge touched 4.62 per cent in October, breaching the central bank’s medium-term target of 4 per cent. “A more aggressive cut is probably not possible as CPI inflation showed signs of uptick,” said Harihar Krishnamoorthy, head of treasury at FirstRand Bank. “Focus will be on keeping liquidity abundant at current levels, which in turn helps keep short term rates benign.”
According to the poll respondents, RBI’s key focus is now on growth. A fear of breaching the fiscal deficit, too, does not pose any threat as surplus liquidity would keep rates under control. The banking system has about ?2.3 lakh crore surplus cash now.
“The risk of doing too much, too quickly is a lot lower than doing too little,” said Aditya Narayan, head of research at Edelweiss Securities. “Growth will be an even more important driver for the RBI policy now.”
Market rates also have been falling in line with the policy rates. Since January, the inter-bank call rate has plunged 135 basis points. During the same period, the benchmark bond yield has dropped 117 basis points.
“Persistent low interest rates and government spending should ultimately push up consumption demand in the next one to two quarters,” said Murthy Nagarajan, head-fixed income, Tata Mutual Fund.
With an expected quarter percentage cut, the room for further rate reductions looks limited. If the RBI cuts rates only by 25 bps, it is likely to keep the door open for another cut in February.
Poll participants expect fiscal policy will need to play a dominant role in supporting overall growth. “I would love you all to keep speculating on fiscal deficit,” said finance minister Nirmala Sitharaman at the ET Awards 2019 on Saturday.