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RBI likely to cut repo rate, reset GDP, inflation forecast; key things to watch out for in MPC meet

There will be four things to watch out for in the RBI's monetary policy statement today -- GDP forecast, fiscal deficit, inflation outlook and repo rate

twitter-logoAnand Adhikari | December 5, 2019 | Updated 08:16 IST
RBI likely to cut repo rate, reset GDP, inflation forecast; key things to watch out for in MPC meet
MPC meet: The economic slowdown will be the topmost priority for the RBI

The Reserve Bank of India (RBI) will release its fifth bi-monthly monetary policy statement today, and it's likely the central bank will go for a 25 basis point repo rate cut because of the persisting economic slowdown. The repo rate currently stands at 5.15 per cent. The six-member Monetary Policy Committee (MPC) headed by Governor Shaktikanta Das is likely to reset the Gross Domestic Product (GDP) and inflation forecasts based on the recent data releases, which are not very favourable. There will be four things to watch out for in the policy statement:

GDP forecast

The GDP has been on a downhill journey for the last six quarters, with the latest September quarter ending at a low of 4.5 per cent. The GDP in the June quarter closed at 5.1 per cent. The RBI projected a much higher second-quarter GDP estimate of 5.3 per cent, which is 80 basis points up than the actual numbers. The deviation puts a question mark on the RBI's yearly estimate of 6.1 per cent for 2019-20. The RBI had already made one downward revision in its annual GDP in the October monetary policy when it reduced the estimate from 6.9 per cent to 6.1 per cent. Now is a strong case to make another downward revision as the average for the first half (April-September) stands at 4.8 per cent. The RBI's current projection for the second half from 6.6 to 7.2 per cent looks quite optimistic. The RBI is likely to make a further downward revision in GDP to 5-5.5 per cent for the entire year.

Fiscal deficit commentary

The signs of a widening fiscal deficit are now visible as the global rating agency Moody's recently acted by changing the country's outlook from stable to negative. The rating agency expects the fiscal deficit to slip from 3.3 per cent to 3.7 per cent of the GDP in 2019-20. The falling GDP and the nominal GDP numbers may impact future tax collection also. The government is already taking a big hit of Rs 1.4 lakh crore after the corporate tax cut. So far, the RBI has maintained that it has no reason to doubt the government's commitment to adhere to the targeted fiscal deficit of 3.3 per cent of the GDP. The recent figures released by the government show the fiscal deficit has surpassed the annual target in the first seven months.

Also read: MPC meet today: RBI likely to slash repo rate by 25 bps to spur economic growth

Upping the inflation outlook

In the October monetary policy, the RBI had revised the CPI or the retail inflation projections to 3.4 per cent for the second quarter of 2019-20 but retained its projections at 3.5 to 3.7 per cent for the second half of 2019-20. But, consumer price index (CPI)-based inflation for September jumped sharply by 71 basis points to 4 per cent. The rise in food inflation pushed up the retail inflation. The core inflation could also see some upward movement going forward because of the hike in telecom tariffs. In fact, the CPI target for the RBI is also at 4 per cent with plus and minus 2 per cent.  There is a likelihood of the RBI changing the inflation outlook for the third quarter of 2019-20.

Repo rate

The RBI has already cut the repo rate by 135 basis points to 5.15 per cent since January this year. The benign inflation for the most part of the year helped the RBI ease interest rates in the economy. While inflation is looking sticky, the economic slowdown will be the topmost priority for the MPC. The RBI under Das has always maintained that it will continue with its 'accommodative' stance as long as it is necessary to revive growth.

Also read: Recession Reality Check: Not recession yet but Indian economy isn't far from it either

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