InvestorQ : Why does it look like the RBI may be compelled to cut off rates by more than 25 bps?
Purvesh made post

Why does it look like the RBI may be compelled to cut off rates by more than 25 bps?

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priya Shah answered.
1 year ago

The central bank may cut-off rate by another 25 bps

The RBI’s Monetary Policy Committee (MPC) is about to announce its bi-monthly policy on 6th June. The central bank has already reduced its short term lending rates (repo-rate) twice. According to the report generated from SBI, RBI needs to go in for a larger rate cut, more than 25 basis points, in the next monetary policy review to increase the economic growth which has fallen to a five-year low in last quarter of 2018-19. Projecting the GDP to grow by 7.2 % in FY20, 0.2% higher than a year ago, CARE rating economist Rucha Ranadive opined that there is a 50 percent chance that the RBI will go in for a 25 bps cut in its June Policy. One basis point equals one-hundredth of a percentage point. The repo rate currently stands at 6 percent.

Why Indian economy needs another rate cut?

According to CII Director General Chandrajit Banerjee, the rate cut is required to address the slowdown in production and sales in consumer goods, across categories like passenger cars, two-wheelers, and even non-durables.

Despite a reduction in rates twice, borrowing costs aren’t decreasing in the economy. Liquidity has also shriveled in recent months as demand for cash picked up ahead of India’s six-week election. It has controlled investment and consumption in the economy, which increases pressure on RBI to take more actions this week.

“The market appears comfortable with further RBI rate cuts with short-term yields and swaps pushing lower post elections,” said Eugene Leow, a rates strategist at DBS Group Holdings

RBI should undergo both – rate cut, and liquidity measures to reach targeted growth rate.