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DBS Group expects RBI to cut 25 bps in the repo rate at June 6 meet

Singapore-based DBS Group expects RBI's rate-setting panel to make a 25-bp cut in the repo rate at the June 6 meeting, taking the total cut to 75 basis points (bps) for this year

twitter-logoPTI | May 30, 2019 | Updated 15:40 IST
DBS Group expects RBI to cut 25 bps in the repo rate at June 6 meet

Singapore-based DBS Group expects the Reserve Bank of India's (RBI) rate-setting panel to make a 25-bp cut in the repo rate at the June 6 meeting, taking the total cut to 75 basis points (bps) for this year.

"The RBI policy committee will decide on rates on 6 June. We look for a 25-bp cut in the repo rate to 5.75 per cent, taking cumulative cuts in 2019 to 75 bps," said Radhika Rao, economist at the DBS Group Research in its report on Thursday.

She said while rates have plateaued, odds for policy rates to fall by another 25-50 bp are rising. "The fluid global environment is a wildcard in this context, particularly as a sharp decline in G3 bond yields and an inversion in the US bond yield curve has revived global growth fears," Rao added in the report.

Any resultant impact on the Indian rupee and markets will leave the RBI on a cautious footing, she said.

Apart from rates, markets are also keen to watch for any tweaks in the liquidity framework from the current stance of 'neutral' to 'surplus', according to the report.

"While such an announcement might not be part of the 6 June rate decision, considering recent OMOs (open market operations) and cash conditions expected to improve after the passage of elections, a change in the framework, might be considered separately," said Rao.

A recent RBI study, interestingly, highlighted that deposit growth holds a closer relationship with nominal GDP trends rather than deposit interest rates, noted the report.

It was established that income levels were the most powerful in driving deposit growth in the short and long term, while rates mattered only at the margin (low coefficients).

"If this view holds water, then the justification that real rates needs to be high to boost deposit growth, weakens, implying policy rates have room to be lowered," said Rao.

This is particularly relevant as the economy is in midst of a cyclical slowdown and cost of financing remains high.

"If the RBI committee provides any clarity on this front, markets are likely to build in more policy easing expectations," said Rao.

Also read: RBI allows banks, NBFCs to use Aadhaar for KYC with customer consent

Also read: Are weak banks just out of RBI's PCA taking on riskier bets in lending?

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