With benign inflation, central bank will have to do this to push sagging growth, say experts

With GDP growth slowing down to a 20-quarter low in the January-March 2019 period and retail inflation well within the median 4 per cent mark, the likelihood of the Reserve Bank of India (RBI) cutting its policy repo rate by 25 basis points (bps) has increased substantially, say experts. This, they say, is necessary to support growth.

The six-member Monetary Policy Committee (MPC) has cut the policy repo rate (the interest rate at which the RBI provides liquidity to banks to overcome short-term mismatches) twice in its last two meetings by 25 basis points each. One basis point equals one hundredth of a percentage point. The repo rate currently stands at 6 per cent.

RBI Govenor Shaktikanta Das will announce the MPC’s decision on the policy repo rate on June 6.

GDP growth plunged to a five-year low of 5.8 per cent in the January-March quarter due to lacklustre growth in agriculture, manufacturing, construction, trade, hotels and power sectors. This, in turn, pulled down the FY19 GDP growth rate to a five-year low of 6.8 per cent.

Though retail (consumer price index based) inflation edged up to 2.92 per cent in April from 2.86 per cent in March, it continues to be within the central bank’s comfort zone of 4 per cent.

The transmission challenge

“The headline CPI inflation trajectory is expected to remain around the RBI’s comfort level of 4 per cent — much of which hinges on food prices,” said Kotak Securities economists Suvodeep Rakshit, Upasna Bhardwaj and Avijit Puri in a note. “We expect the RBI to reduce the repo rate by 50 bps over the next two policy meetings in June and August, factoring in the expected inflation trajectory and the growth prospects.

“However, transmission has been a challenge and it is imperative that bank and market rates transmit the rate cuts.”

Projecting the GDP to grow by 7.2 per cent in FY20, 0.2 per cent higher than a year ago, CARE Rating economist Rucha Ranadive opined that there is a 50 per cent chance that the RBI will go in for a 25 bps cut in its June policy to give an impetus to lagging growth.

From a monetary policy perspective, the stated objectives have been inflation-targeting and supporting growth, said economists.

Thus, one can expect some structural measures from a liquidity perspective, strengthening of the financial framework, and, of course, a relook at rates in the current context of low inflation and flagging growth.

Inflation has been stable even after the spike in prices of vegetables and fruits; consumer price inflation is lower than the target set by the central bank, they added.

Liquidity measures

“One can expect both liquidity measures and a rate cut. Rate-cut expectation ranges from 25 bps to 50 bps. The central bank will see how the fiscal situation unfolds with the Budget announcements and spending measures. It will also take into account global factors, trade tensions, crude price trends, geopolitical equations and the monsoon outlook,” said Shanti Ekambaram, President, Consumer Banking, Kotak Mahindra Bank.

Published On : 02-06-2019

Source : The Hindu Businessline