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Four things to watch out for in RBI's monetary policy review

The RBI is expected to lower the repo rate by 25 basis points (bps) to 5.15%, which would take cumulative cuts so far this year to 135 bps

twitter-logoAnand Adhikari | October 4, 2019 | Updated 09:14 IST
Four things to watch out for in RBI's monetary policy review

The fourth bi-monthly monetary policy review tomorrow (October 4) will be keenly watched as few new developments have taken place post the last review in August. Even RBI Governor Shaktikanta Das was surprised when GDP growth fell to 5 per cent in the first quarter of the current fiscal. Another surprise was when the government cut corporate tax, leaving a big hole of Rs 1.45 lakh crore in tax revenues. The debacle of the PMC Bank has also created uncertainty in the financial system. There are four things that everyone would be watching tomorrow in RBI's commentary. Here is a first look:

Downward Revision in GDP Forecast

The RBI projected GDP growth of 6.8 per cent for 2019-20. The RBI's projection of 5.8 per cent for the first quarter has gone horribly wrong. In fact, the Governor himself admitted it came as a surprise. The world outside is already projecting a much lower growth than what the RBI projected. ADB has pegged it at 6.5 per cent, while leading rating agency CRISIL estimates 6.5 per cent for 2019-20. There is every possibility that RBI would go for 6.2 per cent to 6.5 per cent GDP forecast for 2019-20.

Also Read: RBI enhances withdrawal limit for PMC Bank depositors to Rs 25,000

Assurances on Stability of Financial System

RBI has been facing financial stability issues ever since IL&FS collapsed a year ago. There was not much damage to banks though half a dozen NBFCs faced asset-liability issues with Dewan Housing getting hit the most. The recent debacle of Mumbai based cooperative bank - Punjab and Maharashtra Cooperative Bank (PMC Bank) exposed fault lines in the banking system. There are already rumours of banks folding up because of higher NPAs. In the last fortnight, RBI had to come out twice with a statement assuring general public that the Indian banking system is safe and stable and there is no need to panic. The RBI Governor is likely to reassure people of the soundness of the banking system.

Take on likely fiscal deficit slippages

The slowdown in the economy and recent corporate tax cuts has created new worries on the fiscal deficit front. Experts are concerned about the fiscal deficit breaching the targeted 3.3 per cent of GDP. There is expectation of it slipping to 4 per cent. A higher fiscal deficit would be inflationary. In addition, there are rising borrowings of public sector enterprises. The RBI through the MPC would certainly make a statement in this regard.

Also Read: RBI likely to slash interest rates for fifth time on October 4

Lowering the repo rate

There are expectations of RBI reducing the repo rate by 25 basis points from the level of 65.4 per cent. The repo rate, the rate at which banks borrow funds from the RBI, has already been cut by 110 basis points since January this year. But it all depends upon the three external members of the six-member monetary policy committee (MPC). They would certainly be cautious of geo-political situation and lower growth, falling tax revenues and likely slippages in fiscal deficit numbers.

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