Case for rate cut

With inflationary expectations remaining muted and growth indicators showing signs of cyclical slowdown, there is scope for 25 bps rate cut this time

AuthorPublished: 2nd Apr 2019  12:12 amUpdated: 1st Apr 2019  8:53 pm

India’s gross domestic product (GDP) growth slowed to a five-quarter low of 6.6% in the quarter ending December 2018, and is expected to touch 6.4% in the quarter ending March 2019. The Reserve Bank of India projects that the growth, influenced by factors such as aggregate bank credit and overall financial flows to the commercial sector, would continue to remain steady. Trade wars and related uncertainties appear to be moderating. Taking into consideration all these factors, the GDP growth for 2019-20 is projected to be in the range of 7.2-7.4% in the first half of the current financial year and 7.5% in the third quarter– with risks evenly balanced. The RBI’s Monetary Policy Committee (MPC) revised its consumer price inflation (CPI) projection for the first half of 2019-20 from 3.4-4.2% to 3.2-3.4%, and fixed the third quarter inflation forecast at 3.9%. The MPC also reduced the policy repo rate from 6.5% to 6.25% and changed its monetary policy stance from calibrated tightening to neutral. The RBI noted that the investment activity in the country is recovering but is supported primarily by public spending on infrastructure development. It called for an urgent need to strengthen private investment activity and encourage private consumption.

Growth concerns and low inflation prompted the US Federal Reserve System to keep its policy rates unchanged at 2.25-2.5% through the course of 2019, which could result in a weak dollar in the near-term. With the Federal Reserve on hold, the MPC can now focus solely on inflation and growth concerns in India. The global monetary accommodation could further create room for the central bank to tackle the concerns in its forthcoming monetary policy review on April 4, through further easing. The February CPI at 2.57% remains within the RBI’s target of 4% and is likely to remain so in the short-term. With inflationary expectations remaining muted and growth indicators showing signs of a cyclical slowdown, there is scope for a 25 bps rate cut this time. Risks, however, could arise from volatility in food and fuel prices, monsoon, and fiscal slippages in the coming quarters. Also, uncertainties around the US-China trade dispute, Brexit, Organization of the Petroleum Exporting Countries’ decisions, and cyclical global economic slowdown are likely to keep the emerging markets such as India on the edge.