RBI likely to cut rates for sixth time this year, try help growth

RBI has delivered 135 basis points of interest-rate easing this year, but lenders have only transmitted a fraction of that to borrowers.

The Reserve Bank of India is set to deliver its sixth straight interest-rate cut Thursday, shrugging off a spike in inflation as it stays doggedly focused on supporting economic growth.

While all 34 economists surveyed by Bloomberg News as of Wednesday expect a reduction, the majority expect a quarter-point cut, with the rest expecting reductions of 15 basis points to 50 basis points. The RBI has cut borrowing costs by 135 basis points so far in 2019 to a nine-year low of 5.15%.

The meeting of the six-member Monetary Policy Committee led by Governor Shaktikanta Das, who completes one year in office next week, comes amid deepening concerns about growth, financial stability and weak public finances.

The policy decision will be announced at 11:45 a.m. in Mumbai, followed by a press conference 15 minutes later by Das. Here’s a look at what else to watch out for:

Growth trajectory

The RBI has lowered its growth forecast for the current fiscal year four times already, with the latest revision in October pegging expansion at 6.1%. Data since then has shown gross domestic product expansion slowing to 4.5% in the July to September period, the weakest pace in more than six years.

“With no imminent signs of a turnaround, we expect the RBI to cut rates by 25 basis points at its December meeting,” said Teresa John, an economist at Nirmal Bang Equities Pvt. in Mumbai. The July-September period saw economic slack deepen, with manufacturing contracting. A purchasing managers survey indicated that activity in the dominant services industry slowed during that period. With surveys for both manufacturing and services in November pointing to a rebound, it’s worth watching if and by how much the RBI will further lower its growth forecast.

Business Standard

As news goes from bad to worse, Modi govt scrambles to revive the economy

Finance Minister Nirmala Sitharaman said this week she's not closing the door on additional steps to support the economy.

Business Standard : The bad news is getting worse for India’s economy and Prime Minister Narendra Modi is exhausting all options to stem the fallout. Data on Friday will likely show the economy had its weakest performance last quarter in more than six years, with the growth rate dropping below the symbolically important 5% mark. It’s a culmination of several months of downbeat figures, from plunging car sales to shrinking factory output and an export slump.

Having left much of the stimulus burden to the central bank early this year, Modi is now taking bolder steps to reverse the decline. In recent months, the government has slashed corporate taxes, set up a special real-estate fund, merged banks and announced the biggest privatization drive in more than a decade. While authorities are committed to doing more, the policy room may be narrowing. “Domestic demand is displaying chronic weakness, with an apparent credit crunch afflicting wide swaths of the economy,” said Taimur Baig, chief economist at DBS Group Holdings Ltd. in Singapore. “Production and sales are under pressure, and public spending is running out of room due to poor tax collection.”

Why in India, 6% Economic Growth Is Cause for Alarm: QuickTake

Friday’s eagerly awaited data will probably show gross domestic product grew 4.5% in the July-September period from a year ago, according to the median estimate of 41 economists surveyed by Bloomberg. That would be the slowest pace since the March quarter of 2013. India was the world’s fastest-growing economy until last year, posting quarterly growth rates of as high of 9.4% in 2016. A crisis among shadow banks -- a key source of funding for small businesses and consumers -- weak rural spending and a global slowdown have since conspired to bring down growth steadily.

“The nature of the slowdown is broad-based, with consumption as well as investment oriented sectors feeling the pain,” said Indranil Pan, chief economist at IDFC First Bank Ltd. in Mumbai. “Continuing poor domestic sentiment along with the lack of any demand uptake globally would ensure that any recovery process would only be gradual.”

Aggressive Easing

The Reserve Bank of India has already cut interest rates by 135 basis points this year to the lowest since 2009, with more easing to come. The central bank is expected to look through the recent breach of its 4% medium-term inflation target and deliver another rate cut on Dec. 5. India’s Central Banker Das Faces a Tough Balancing Act (1) “The onus is on the government to do the heavy lifting,” said Devendra Pant, chief economist of India Ratings and Research, a local unit of Fitch Ratings Ltd..

RBI faces calls to do more than just one rate cut amid economic slowdown

Finance Minister Nirmala Sitharaman has ratcheted up pressure on the six-member monetary policy committee for a 'significant cut' to lift economic growth from a five-year low.

Business Standard : India's central bank is poised to deliver its fourth successive quarter-point interest rate cut on Wednesday, amid calls from investors and the government for further easing as a slowdown gripping the economy becomes more pervasive.

The Reserve Bank of India will lower the benchmark repurchase rate by 25 basis points to 5.5 per cent, according to almost all of the 36 economists surveyed by Bloomberg.

Swap markets are pricing in at least another 50 basis points of reductions before the end of 2019.

Finance Minister Nirmala Sitharaman has ratcheted up pressure on the six-member monetary policy committee for a "significant cut" to lift economic growth from a five-year low.

Inflation that's stayed below the central bank's 4 per cent medium-term target for 11 months in a row and the Federal Reserve's first rate cut since the financial crisis allows room to retain the policy makers' easing bias.

ALSO READ: Monetary policy review: RBI may cut rate, but commentary will be cautious

A quarter-point cut will take the benchmark rate to the lowest since April 2010. With price pressures anchored, the central bank may have the leeway to keep rates lower for longer.

"We expect 75 basis points of additional rate cuts spread over August, the fourth quarter of 2019 and the first quarter of 2020, taking the repo rate to 5 per cent by March 2020," said Pranjul Bhandari, chief India economist at HSBC Holdings Plc in Mumbai. The headline inflation will stay below the RBI's medium-term target for the "foreseeable future" due to a lack of underlying price pressures across sectors, she said.

RBI set to cut interest rate in August for the fourth time in a row: Report

They are going to cut rates in August and again later, mainly due to low growth and weak inflation, said an economist.

The Reserve Bank of India is set to cut interest rates in August for the fourth meeting in a row, according to a Reuters poll of economists, a majority of whom said risks to their already-modest growth forecasts were skewed more to the downside.

If the RBI does cut rates next month, it will be the most aggressive amongst dovish central banks in Asia. The last time the RBI delivered so many back-to-back cuts was after the global financial crisis over a decade ago, when most major central banks went on a cutting spree to revive economic growth.

Almost 80 per cent of 66 economists in the July 17-24 poll expected the RBI to cut its benchmark repo rate by 25 basis points to 5.50 per cent at the Aug. 7 meeting. Three respondents predicted a 50 basis points cut and the remaining 10 forecast policy on hold.

"It is baked in the cake. They are going to cut rates in August and again later, mainly due to low growth and weak inflation," said Gareth Leather, senior Asia economist at Capital Economics.

India's inflation has remained below the central bank's medium-term target of 4 per cent for almost a year and is not expected to rise significantly above that until at least 2021. The poll's findings support RBI Governor Shaktikanta Das' recent comments about the central bank's accommodative stance and suggests further easing.

Indeed, following next month's expected move, the next rate cut is seen in early 2020, after which the RBI is forecast to keep rates on hold at 5.25 per cent through to end-2020.

Yet despite three interest rate cuts this year and expectations for more, India's growth outlook was downgraded in the latest poll compared to the previous quarterly economic survey in April.

Business Standard

RBI could make it three cuts in a row on subdued growth, benign inflation

The policy decision will be announced at 11:45 a.m. in Mumbai, followed by a press conference 15 minutes later by Shaktikanta Das.

The Reserve Bank of India is likely to cement its position as Asia’s most dovish central bank with a third straight interest-rate cut Thursday.

Keep Reading : Business Standard

The six-member monetary policy committee led by Governor Shaktikanta Das will reduce the repurchase rate by 25 basis points to 5.75% on Thursday, say 31 of 43 economists surveyed by Bloomberg, while three are penciling in a 50 basis points cut. The RBI may also switch its stance to accommodative from neutral, given that expectations are growing for the Federal Reserve to slash rates this year.

Inflation that’s stayed close to the lower end of RBI’s 2-6% band for six months has given policy makers room to support economic growth. India is among central banks across Asia shifting to looser monetary policy to boost their economies amid risks from the U.S.-China trade war. Philippines, Malaysia and New Zealand eased last month, while Australia cut interest rates this week for the first time in almost three years.

The policy decision will be announced at 11:45 a.m. in Mumbai, followed by a press conference 15 minutes later by Das. Here’s a look at what else to watch out for in the decision that comes weeks before the new government’s annual budget on July 5:

Subdued Growth

Gross domestic product growth slowed to a five-year low of 5.8% in the first three months of the year. Investment has been subdued and early indicators from auto sales to air travel show consumption -- which contributes more than 60% to GDP -- has waned amid a crisis in the shadow banking sector that’s curbed lending.

At its last policy meeting, the central bank cut its GDP forecast for the current fiscal year to 7.2% from 7.4%. Still, the reading depends on how the crucial monsoon season pans out. For now, the southwest monsoon, which waters more than half of India’s farmland between June and September, is expected to bring normal rainfall.

Economists have already trimmed GDP forecasts to 7.1% for fiscal 2020 in the latest Bloomberg survey from 7.2% previously.

“The muted growth seals the case for more rate cuts,” said Upasna Bhardwaj, an economist at Kotak Mahindra Bank Ltd. in Mumbai. “We maintain our expectation of 25 basis point rate cuts in June and August —- though an outside chance of a 50 basis-point rate cut in June itself could build up.”

5 factors that shaped RBI's inflation forecast and 6 key risks

Besides a normal monsoon, the inflation path, according to the RBI, will be shaped by five factors.

The Reserve Bank of India (RBI) slashed repo rate by 25 basis points (bps) to 6 per cent in its First bi-monthly Monetary Policy Statement for financial year 2019-20 (FY20). The central bank, however, has assumed the monsoon to be normal this year.

Recently, private weather forecaster Skymet had forecast below-normal monsoon rains during June-September, with a 15 per cent chance of a drought.

Consumer price inflation (CPI) projection, as a result, has been revised downwards to 2.4 per cent in Q4FY19, 2.9-3 per cent in H1FY20 and 3.5-3.8 per cent in H2FY20, with risks broadly balanced.

"The RBI has adopted a very sensible and pragmatic approach by cutting the repo rate by 0.25 per cent while keeping the policy stance neutral. It takes cognizance of the likelihood or potential for inflationary pressures emerging from food prices and fuel prices and also fiscal pressures from the large government borrowing program," said Dr. Joseph Thomas, Head Research- Emkay Wealth Management.

“RBI has held on to its gradualist approach in choosing to cut REPO rate by 25bps and maintaining neutral stance. The two key risk events for inflation trend in the year ahead - monsoons and elections, cloud the near term inflation outlook and warrant continued data dependency. The forward guidance for growth and inflation remains mixed and indicate shallow cuts here and there and not a cut cycle for now,” added Rajni Thakur, an economist at RBL Bank.

Besides a normal monsoon, the inflation path, according to the RBI, will be shaped by the following five factors:

First, low food inflation during January-February will have a bearing on the near-term inflation outlook, the RBI said.

Second, the fall in the fuel group inflation witnessed at the time of the February policy has become accentuated.

Third, CPI inflation excluding food and fuel in February was lower than expected, which has imparted some downward bias to headline inflation.

Fourth, international crude oil prices have increased by around 10 per cent since the last policy.

Fifth, inflation expectations of households as well as input and output price expectations of producers polled in the Reserve Bank’s surveys have further moderated.

Business Standard

Despite RBI prod, banks unwilling to cut lending rates as deposits dwindle

Shaktikanta Das, the new RBI governor, has been trying to nudge bankers to lower lending rates, holding meetings with bank chiefs last month to discuss the monetary policy transmission.

Business Standard : Indian lenders haven’t fully passed on the central bank’s latest interest rate cut to borrowers, pressuring the monetary authority to loosen policy even more to support economic growth.

A mismatch between deposits and credit growth, and competition from the government for small-savings mean banks face a high cost of capital, limiting their ability to transmit monetary policy easing. Bankers say the Reserve Bank of India’s 25 basis-point reduction in the repurchase rate to 6.25 percent in February was a start, but was probably too little to have any impact on lending rates just yet.

Latest data from the central bank shows the main overnight lending rate offered by commercial banks has been sticky in a range of 8.15 percent to 8.55 percent since the beginning of the year. Most banks have trimmed lending rates by a ‘token’ 10 basis points, said Ashutosh Khajuria, chief financial officer at Federal Bank Ltd. in Mumbai, adding that the RBI needs to move by a bigger-than-usual 50 basis points to spur lending.

“If it is a 50 basis points cut, it will be an accelerated transmission,” Khajuria said. “If inflation behaves the way it has been,” rates will certainly go down in the first quarter of the next financial year starting April.

Subdued Inflation

Calls for rate cuts have been building, given benign inflation and weak demand. Inflation has been subdued at about 2 percent, much lower than the central bank’s medium-term target of 4 percent.

Shaktikanta Das, the new RBI governor, has been trying to nudge bankers to lower lending rates, holding meetings with bank chiefs last month to discuss the monetary policy transmission. In India, rate adjustments take about six to nine months to work its way through the economy.

Bankers remain cautious though and “are not willing to cut rates as deposits and household financial savings are at historical lows,” said Prachi Mishra, chief India economist at Goldman Sachs India Securities. “Even while policy rates are down, the rates paid by the government on small savings are significantly higher than bank deposit rates.”

Savings programs offered by the government through post offices return between 7 percent and 8 percent annually along with tax benefits, while a one-year time deposit with the State Bank of India, the country’s largest bank, earns an interest of 6.9 percent.