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Is the RBI planning another rate cut soon?


Is the RBI planning another rate cut soon?

The Reserve Bank of India (RBI) may set celebratory crackers bursting even before the onset of the festive season in India this year. This is because several industry experts and economists are anticipating a further cut in repo rates courtesy the apex bank of the country.

In a unique trend to spark growth, the RBI has already cut repo rates three times in succession, giving customers a major reason to cheer as their home loans got cheaper along with scaling up demand for several financial products.

Will the RBI actually cut rates again?

In spite of an increase in inflation in June 2019, the RBI is planning another rate cut when it releases its third credit policy for the present financial year. This will be done on 7th August 2019.

Here are some key points to consider in this regard:

  • The RBI is reportedly considering another repo rate cut to the tune of 25 basis points for the 4th time in succession.
  • This may lower the repo rate to 5.50% for driving higher growth.
  • The MPC (Monetary Policy Committee) will continue emphasizing on spurring higher economic growth across the country.
  • The repo rate is the signaling rate as per experts and the rate at which short-term (overnight) funds are borrowed from the RBI by banks through pledging government bonds.
  • RBI is certainly considering a cut in the repo rate as per several experts since they have ample room for reducing policy rates. Inflation has not gone beyond the target of the apex bank and there is the need to drive further growth as well.
  • The bone of contention is the increase in the CPI (Consumer Price Index) which jumped up to 3.18% in June 2019 which was the highest figure achieved in 8 months.
  • 05% was the CPI in the month before, indicating this worrisome rise.
  • CPI is the basis for working out retail inflation and the latter has been going up from January 2019 although it is weaker as compared to the figure in the same period a year ago (June 2018) when it reached 4.92%.
  • The inflation rate is also lower as compared to the medium-term goal of RBI at 4% for close to a year. Hence it is not expected to go up considerably in the near future as per several experts.
  • Experts and markets are anticipating a cut in repo rates by 25 basis points particularly since inflation has remained restricted.
  • The last MPC meet took place on 6th June 2019 and repo rates were cut by 25 basis points to stand at 5.75% which was the third reduction in succession. The stance also transformed into accommodative.
  • Inflation in the country has remained well below the 4% medium-term target for close to one year as mentioned and will remain at steady and under-control levels until the year 2021 at least as per recent reports.

Inflation may increase on a temporary basis on account of drought and some other factors. However, the repo rate may head for another cut of 0.25% in the final quarter of the current financial year around March 2020 as inflation levels come down. This is the perception held by several economists and market players.

Governor of the RBI, Shaktikanta Das, has been busy in meetings with several banking industry heavyweights, directing them to lower rates in sync with the cut in key policy rates. RBI has already cut repo rates by 75 basis points in the present calendar year. However, banks have been slower with regard to revising their own rates, justifying this by stating that repo rates are only a part of their overall costs. SBI (State Bank of India), however, has come up with a unique home loan offering where interest rates are tied to the repo rate which will reduce instantly once this is reduced by the RBI.

Other factors worth noting

Even the Union Finance Minister, Nirmala Sitharaman, stated that a rate cut from the RBI would be a good thing. However, this statement led to a fall in bond yields in the country. However, the Government will remain steadfast in its plan of sovereign bond issues. Sitharaman opined that a major rate cut by the RBI will be good for the Indian economy as per reports.

She also stated that there may be space for another rate cut and also opined that this was the perception of Indian industry too. The 10-year benchmark bond yield in the country came down to 6.42% recently which indicates de-growth of 11 basis points due to this statement. Some experts have thus opined that the Reserve Bank of India should wait it out a little more to assess the overall effect of previous cuts in repo rates and the impact of the monsoon on crop pricing before going for another cut in repo rates.


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