Economists, experts expect another RBI booster dose to prop up slowing economy

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The Reserve Bank of India is expected to administer another booster dose of lending rate cut to break the slowdown induced downward growth spiral rather than change its stance to inflation targeting to control rising food prices, economists opined. The RBI's Monetary Policy Committee (MPC) will release its resolution on the monetary policy later on Thursday.

Economists and industry experts, pointed out that despite a rise in retail food inflation, growth concerns will necessitate RBI to go in for another rate cut during the pan-ultimate monetary policy review for FY20. "The spike in the CPI inflation in October 2019 has contrasted with the moderation in the GDP growth in Q2 FY2020, complicating the next policy decision," ICRA's Principal Economist Aditi Nayar said.

"In October 2019, the MPC had indicated that it would retain the stance as accommodative for as long as necessary to revive growth. Based on this, there appears to be a high likelihood of another repo rate in the December 2019 policy review, with the MPC likely to look through the vegetable price-led uptick in the CPI inflation."

Lately data showed that a substantial rise in food prices had lifted India's October retail inflation to 4.62 per cent from 3.99 per cent in September. Significantly, the data indicated that retail inflation level has breached the medium-term target for Consumer Price Index (CPI) inflation of 4 per cent. The target is set within a band of +/- 2 per cent. But, another macro-data point showed that consumption trend along with a massive contraction in manufacturing, agriculture and mining activities subdued India's GDP growth rate down to 4.5 per cent in the second quarter of 2019-20.

"We think the RBI will continue with an accommodative stance on monetary policy to boost the revival of domestic demand. Growth versus inflation - are the two big data trends that will guide the MPC when it delivers its stance. To keep a balance between growth and inflation, we believe that in the upcoming policy the committee will focus on reviving growth as their primary objective, while keeping a close eye on the inflation readings," Sidharth Rath, MD & CEO, SBM Bank India said.

Though experts are divided on the quantum of cut that MPC may adopt to maintain its support for growth, a range between 25 and 50 basis points cut in repo rate is being expected to bring down the cost of finance and give impetus to consumption growth.

"We expect more than 25 basis points cut in upcoming policy. This should take the repo rate down to at least 4.90 per cent. We think there is more steam in conventional rate cut cycle," Edelweiss Securities Lead Economist Madhavi Arora told IANS.

The bad news on the economic front has not only come from the latest GDP numbers, but earlier released performance of key core infrastructure sectors also showed that economic activity in the country has come to a standstill. The growth in industrial production has also been subdued for past few months.

"Given the increased concerns on growth with the Q2 GDP print at 4.5 per cent, we believe the accommodative policy will continue in the near term and MPC will actively consider a rate cut again," Acuite Ratings and Research's Lead Economist Karan Mehrishi said. 

"The rate cut can be between 25-50 basis points."  Monetary policy easing is expected to provide more elbow room to banks to reduce their lending rates and help both consumers and the industry to get cheaper finance. This is expected to fuel both investment and consumption, the two key elements needed for taking the economy back on growth path.

"The MPC Meeting this time is set against an interesting backdrop - rising CPI data and a falling GDP growth. Super impose easing interest rates across the globe, further aggravates the situation. However, the high real rates in India suggest a case for further easing given that CPI rise is largely food prices driven. This Tug of war, in our view, may pave way for an additional rate cut in the upcoming policy," Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company (KMAMC) said.

However, according to Brickwork Ratings' Chief Economic Advisor M.Govinda Rao: "This reduction will certainly not be sufficient to spur growth to the extent desired. First of all, given the low level of the household sector's financial savings, the transmission will be sticky." "Besides, the hesitancy and the fear factor of the bankers to lend to the manufacturing sector have not been addressed yet." Interestingly, a faster transmission of earlier policy easing by lenders is urgently required, as high interest rates and liquidity constraints have demoralised auto, home and capital goods buyers.

"Transmission of rate cuts still remains an issue as the positive effect of the five consecutive rate cuts is not visible in the economy," said Geojit Financial Services' Economist Deepthi Mary Mathew. In October, the RBI's MPC stuck to its "accommodative stance" by reducing its key lending rate to 5.15 per cent, the lowest in around a decade. The record low repo was set at 4.75 per cent in April 2009 as a result of the global financial crisis.

"...the spike in inflation is mainly because of high food inflation, especially vegetable prices, which could be seasonal. Core inflation is low and is likely to remain muted given poor aggregate demand in the economy. In such a scenario, economic slowdown is likely to take centre stage and we expect RBI to cut policy interest rate by around 25 bps. With policy transmission by banks improving, credit cycle is likely to get some fillip," Shishir Baijal, Chairman & Managing Director, Knight Frank India said.

Lower interest rates is expected to give a boost to real estate sector that has been suffering from not just tight credit conditions but also poor consumer sentiments and purchasing power. Moreover, any further measure by RBI to ease credit availability for NBFC sector will also provide relief to the real estate sector, Baijal said.

The general sense is also that RBI may not be able to achieve the desired economic revival only by monetary policy tool. The Government may have to pitch in with further fiscal stimulus, even if it comes at the cost of breaching the budgeted fiscal target, experts opined.

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