MPC may break with 25 bps cut tradition, 35 bps cut seen to bolster growth

Last Updated: Wed, Jun 05, 2019 15:45 hrs
Shaktikanta Das, RBI Governor (Image Courtesy: Wikipedia)

Mumbai: With GDP growth touching a five-year low, the RBI may go for a 35 basis points cut in benchmark policy rates at its bi-monthly Monetary Policy Committee's rate review meeting starting from Wednesday.

The MPC, headed by RBI Governor Shaktikanta Das, had started meeting for three days beginning June 3 to firm up the second bi-monthly monetary policy of the fiscal. The RBI rate cut hopes pushed the Sensex to a new high above 40,000 points.

"Market has hit a new all-time high on expectations that the Reserve Bank of India, in the forthcoming monetary policy on June 6, might cut rates by 50 basis points," Naveen Kulkarni, Head, Research at Reliance Securities, said.

The RBI has already cut rates twice, by 25 bps each time, during the year to support growth, and raise demand with inflation at a moderate level. India's economy grew slower to a 18-quarter low in the January-March quarter at 5.8 per cent, pulling down the annual growth to a five-year low in FY19 to 6.8 per cent.

Taking a cue from this, the central bank is widely expected to cut interest rates further from 6 per cent to reinvigorate the flagging economy but sources said this could be as high as 35 basis points, looking at the slackeness in the economy.

Bank of America-Merrill Lynch says that the RBI will lower its benchmark interest rate by an unconventional 35 basis points.

"Fading fiscal/rupee risks, after PM (Narendra) Modi's re-election, should allow a cut greater than 25 basis points, in line with Governor Das' out-of-the-box proposal," BofAMerrill Lynch Global Research said in a note.

Dalal Street sources said that it is not just the slowing economy, but Governor Das is also a radical thinker and earlier this year, he, at a global forum, had announced his intention to break away from the tradition of 25 bps cuts and try out other permutations.

Das's comments in Washington in April that central banks could be more flexible in the size of rate adjustments, rather than sticking to the usual moves of 25 basis points at a time is more applicable today looking at the grim economic situation, said the sources.

Dalal Street also called for a change in policy to "accommodative" from "neutral".

"While growth is likely to recover modestly in FY20, it is still likely to remain below long-term average. Hence, a slack in growth is likely to strengthen the case for a further rate cut," ICICI Securities said in a June 3 note.

North Block also is supportive of a rate cut, though they wouldn't hazard a guess on the quantum of the cut.

Finance Secretary Subhash Chandra Garg recently said there has been reduction in policy rate in the last two policies announced since February.

It is for the MPC to take a view on the policy rate taking into consideration low inflation and moderation in the economic growth. Inflation continues to be much lower than the target, he said, adding core inflation is also now on a decline.

Core inflation, along with headline inflation, have eased substantially, falling in April to 4.5 per cent, its lowest in 18 months. This allows the central bank the much-needed leeway to cut rates in a higher order looking at the slump in growth.

Some market experts said it cannot be 50 basis points as a few have projected. "We do expect a rate cut from the RBI in June 6 monetary policy with either a 25 bps cut or a non-traditional 35 bps cut as indicated by RBI Governor Shaktikanta Das at the IMF meeting in April," an expert said.