RBI revises GDP growth forecast to 6.1%

Andrew Cummings
October 4, 2019

"The committee said it would maintain an "accommodative stance" as long as it is necessary to revive growth while ensuring that inflation remains within the target".

The fourth bi-monthly monetary policy for 2019-20 was announced by RBI Governor Shaktikanta Das-headed Monetary Policy Committee (MPC) after its three-day marathon meeting. That has raised expectations the RBI will be forced to further downgrade its growth projection of 6.9 percent for the current fiscal year. The reverse repo rate was reduced to 4.9%.

"In conformity with this aggressive approach, RBI is likely to continue with its campaign for more rapid transmission of the benefits to credit users, through lower rates to a large extent linked to the base rate".

"Repo rate has been cut by 25 basis points, from 5.40% to 5.15%". The next meeting of the MPC is scheduled during December 3-5, 2019. Data since has shown gross domestic product expansion slowing to 5% in the June quarter, the weakest pace in six years.

The recent volatility in crude oil prices following the drone attacks on Saudi Aramco, coupled with the potential impact of the govt's recent fiscal measures on fiscal deficit and inflation, could mean that the room for a rate cut may be limited.

The government has already announced a series of measures, including a steep cut in corporate tax and rollback of enhanced surcharge on Foreign Portfolio Investors, among others to jump-start growth.

"RBI has once again proved to be well ahead of the curve in unleashing monetary efficacies to combat the economic slowdown, in perfectly complementing the fiscal initiatives", Dr K. Joseph Thomas, Head Research-Emkay Wealth Management, told Moneycontrol. As against the cumulative policy repo rate reduction of 110 bps during February-August 2019, the weighted average lending rate (WALR) on fresh rupee loans of commercial banks declined by 29 bps. Addressing some of those worries, the RBI said earlier this week the banking system was "safe and stable".

"With the linking of floating lending rate to external benchmark, the transmission of rate cuts from here will be immediate".

According to NAREDCO president Niranjan Hiranandani, there is an expectation of a further 50 basis points repo rate cut in the backdrop of muted inflation which stands lower than the expected 3.2 percent.

Retail inflation inched up to 3.21 percent in August but remained within the RBI's comfort zone.

The government has mandated RBI to ensure that inflation remains below 4%, with a deviation of 2% on either side.

But just how much of a cut will it be?

If the RBI delivers a 25 bps cut as expected, traders will focus on the wording and tone of the monetary policy statement for clues on further easing.

"It is in this context that the MPC made a decision to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target", the note added.

Banks have passed only a small portion of the RBI's cuts this year to customers.

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