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RBI MPC meet: 6 reasons why Governor Shaktikanta Das might go for rate cut

Analysts at BofA Securities expect the RBI to slash policy rates by 100 bps in FY21 as base case, with 25 bps cut on August 6 to revive the coronavirus-hit economy 

Chitranjan Kumar | August 4, 2020 | Updated 15:46 IST
RBI MPC meet: 6 reasons why Governor Shaktikanta Das might go for rate cut
RBI MPC, headed by Governor Shaktikanta Das, will announce its policy decision on August 6

The Reserve Bank of India's monetary policy committee (MPC), chaired by Governor Shaktikanta Das, will unveil its policy statement this week, where the apex bank is widely expected to cut repo rates. Given the urgency to revive the coronavirus-hit economy, the August MPC meet is very crucial amid growing demand for one-time loan restructuring by industry chambers. The MPC has started its three days meeting today, while it will announce its decision on August 6.

Experts are, however, divided over the possibility of another rate cut arguing that one-time loan restructuring was more essential at this juncture to tide over the coronavirus situation. Analysts at BofA Securities expect the RBI to slash policy rates by 100 basis points (bps) in the current financial year 2020-21 (FY21) as base case, with 25 bps cut on August 6 to revive the coronavirus-hit economy. 

Also Read: RBI MPC meet to start tomorrow; to announce policy stance on August 6

BofA Securities has given six reasons for RBI to cut rates;

To mitigate impact of COVID-19 pandemic

The RBI has been taking steps proactively to limit the damage to the economy caused by the COVID-19 pandemic and subsequent lockdowns. According to BofA Securities, the COVID-19 shock is set to contract Indian economy, as measured by gross domestic product (GDP), by 20 per cent in the April-June quarter (Q1 FY21) and 6 per cent in the full financial year FY21, in base case scenario. It assumes that current Unlock restrictions extend to mid-November with the restart taking six weeks to December.

CPI inflation within RBI's comfort zone

The brokerage firm has forecasted that rains and base effect could bring retail inflation (CPI) down to 2.5 per cent in the second half of the fiscal year (H2FY21) from 6.3 per cent in July as supply side disruptions (evident in a growing wedge between CPI and WPI food prices) and methodological issues iron out. Besides favourable base effects ahead along with weak fundamental drivers such as GDP contraction, improved sowing and low "imported" inflation, support case for rate cut.

Also Read: RBI MPC meet: Central bank to decide on policies for reviving growth

High real lending rates still hurt growth

High real lending rates hurt growth beyond the COVID-19 shock. While nominal MCLR (Marginal cost of funds-based lending rate) has come off by 105 bps since March 2019, on RBI easing, real MCLR is still up by 44bps, BofA Securities said.

'Busy' industrial season begins in October  

According to analysts at BofA Securities, time is running out for RBI rate cuts with the 'busy' industrial season beginning October. As loan demand picks up seasonally, transmission of RBI easing would become more difficult.

Rising money supply growth: rate cuts, HTM, FX forwards

Rising Money Supply (M3) growth, at 12.4 per cent above the agency's forecast of 9.1 per cent, constrains the RBI from trying to contain yields through quantitative easing ($105 billion Open market operations) as freely as in the past. It is for this reason, the agency expects the RBI to extend held-to-maturity (HTM) to its expected additional borrowing of 4 per cent of GDP/5.3 per cent of NDTL as well as buy FX ($17.2bn BofAe) forward.

Adequate forex reserves allow RBI to cut rates

Adequate forex reserves should provide room for the RBI to cut rates and support recovery. The BofA Securities estimates that the RBI can sell $50 billion to defend Indian rupee in case of a speculative attack. RBI action to support growth should attract FPI equity flows, it added.

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