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RBI may shower rate cuts this year, start with 25 bps on Jun 6

Economists see up to 100 bps reduction this year on stable govt and need to push growth

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Reserve Bank of India (RBI) is widely expected to bring down lending rates when it will unveil its second monetary policy of this fiscal on June 6.

With the Narendra Modi-led government coming back to power with a majority, economists and bankers expect the central bank to bring down rates by 25 basis points in its policy. The BJP manifesto which had promised it would bring down the cost of capital is another signal that rates would be soft.

RBI move is expected to give a push to growth in the economy cushioned by low inflation trailing at 2.92%, albeit marginally higher than 2.86% reported in March. But the worry is that the momentum in CPI (consumer price index, or retail inflation, which is RBI's focus) emanated primarily from rising food concerns, while the growth concerns moderated the wholesale price inflation (WPI).

WPI tracks the price of commodities sold between companies, or bulk prices. If there is a concern over growth the prices of bulk goods fall. Both the baskets of goods in CPI and WPI have oil as a component.

"We are expecting a cut, but they may go all the way with a 25 bps but settle for a smaller cut. There are uncertainties about the oil prices and the distribution of rains," said Saugata Bhatttacharya, chief economist Axis Bank. The risks of inflation cannot be allowed to re-emerge with lower rates, he said.

The United Nations has lowered its forecast for India's GDP growth to 7.01% in April 2019, lower than its earlier estimate of 7.5%, basing its action on the slowing global growth. It has also downgraded growth forecast, both in developed and developing countries.

Abheek Barua, chief economist, HDFC Bank, said, "They should not be cutting rates at this stage. But I think they may cut to promote growth. They should rather be solving the liquidity issues and the fiscal situation."

Bankers and economists caution about the depleting food stocks and crude oil prices reversing. The prospect of El Nino dimming the prospect of a normal monsoon is another risk of inflating the food prices, especially the Kharif crop, which is rain-fed. "Every year we have surplus food stocks. This year we don't have that cushion due to cropping patterns and crop failures." said an economist

Ashutosh Khajuria, executive director, Federal Bank, said, "The Australian Met department has already warned of El Nino formation which may impact the spatial distribution of monsoon, and the kharif crop most dependent on the rains will be impacted. The fuel prices are reversing with crude oil at $70 a dollar."

Doubts about a normal monsoon and a rise in oil prices are likely to force RBI to revise its projections. When the central bank unveiled its first monetary policy of the fiscal, it thought there was no need to chase the monsoon this time as the rains were expected to be normal. With benign food prices for close to a year the central bank had cut its retail inflation forecast to 2.9-3% for the first half of the current fiscal.

But inflation can never be off the table. India's retail inflation rate for April 2019 increased marginally to 2.92%. This was a five-month high of 2.86% in March 2019 from 2.57% in February 2019.

Bank of America Merrill Lynch Global Research in a report said, "We grow more confident of our call of lending rates coming off by 50 bps to support recovery after PM Modi's historic victory (of 303/543 seats in parliament) in the general elections today. Looking ahead, we expect the RBI MPC to cut 35 bps (up from 25 bps earlier) on June 6 (and 100 bps in 2019) with May inflation tracking a low 3.3%."

Figures from RBI also show that consumption is slowing down with lower growth rates for loans taken for vehicles, home vehicle and personal purposes.

Kotak Securities in a report said the growth in the economy, which had been supported primarily by consumption and government spending, has slowed considerably. Additionally, the fiscal space to support capital expenditure in fiscal 2020 will be limited, given the tall task from GST collections and higher revenue expenditure. We see a limited impetus to economic growth and expect GDP growth to weaken to 6.8% in fiscal 2020 from 6.9% in fiscal 2019. Against this backdrop, we believe that the MPC would cut the repo rate by another 25-50 bps in the rest of calendar year 2019, although for the rate cuts to be effective, structural liquidity concerns will need to be addressed."

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