Face of Nation : Rising concerns on a growth slowdown in the domestic market and a favourable inflation trend have raised market expectations of a sharp cut in repo rate by the RBI, in the past month. After cutting its policy rate by 25 basis points and changing its stance from neutral to accommodative — in the June policy — the RBI threw open the possibility of more rate cuts in the coming months. June CPI inflation remaining well below the RBI’s 4 per cent target (though food inflation inched up) has also kept expectations of a rate cut in the August policy, intact.
While a rate cut could well be on the cards in Wednesday’s policy review, the million dollar question is: how much will the RBI deliver by way of a rate cut this time around.
Over the past few weeks, fresh concerns on domestic growth and a rising wave of monetary easing all over the world, have increased expectations of a sharp 35 or 50 basis points cut in repo rate by the RBI in the August policy. But with US President Donald Trump imposing new tariffs on Chinese goods last week and the escalating trade war between the two countries, turbulence in financial and currency markets globally may force the RBI to take a less aggressive stance on its rate action.
The rupee, which was holding well, has come under sudden pressure. A sharp cut by the RBI could only do more harm than good at this juncture. Rate action by the RBI has always hinged on the growth-inflation dynamics at play.
On the growth front, the persisting slowdown in demand reflected in the recent auto sales numbers and weak consumption, further accentuated by the ongoing crisis in the NBFC sector, have only strengthened the case for a further monetary easing.
GDP growth fell sharply in the March quarter of FY19 to 5.8 per cent (in real terms), led by a slowdown across agriculture (negative growth), manufacturing, construction and trade. With consumption remaining weak, and sluggishness in private investment activity, GDP growth could well dip lower in FY20, from the 6.8 per cent level in FY19.
The inflation trend so far has also been benign. In June, while CPI inflation moved up to 3.18 per cent from 3 per cent in May — on the back of higher food inflation — core inflation (excluding food and fuel) has been inching lower. Inflation in clothing, housing, health, transport and education has been trending lower over the past few months, accentuating growth concerns.
While food prices on a low base may inch up in the coming months, a fall in crude and commodity prices could keep overall inflation under check.
Hence, with a favourable underlying growth-inflation mix, there is a high possibility for the RBI to deliver more rate cuts in the coming year.
