All eyes on RBI amid trade woes, central bank may cut repo rate
Among things that will shape the decision of the monetary policy committee (MPC), the rate setting body, will be the economic slowdown, low inflation and geopolitical tensions.Updated: Aug 07, 2019 10:59 IST
The Reserve Bank of India (RBI) is expected to deliver a 25 basis points (bps) cut in its repo rate on Wednesday, the fourth in a row since Shaktikanta Das took over as the governor in December last year.
Among things that will shape the decision of the monetary policy committee (MPC), the rate setting body, will be the economic slowdown, low inflation and geopolitical tensions.
ON INDIA’S GROWTH FORECAST
The central bank is likely to further lower its gross domestic product (GDP) forecast for FY20, over and above the 20 bps cut to 7% it made in the June policy. A slowdown in consumption demand, government spending and the lack of quality jobs have resulted in India’s growth slowing down. The International Monetary Fund on July 23 lowered India’s GDP growth rate for FY20 to 7% from 7.3%, citing poor demand conditions. GDP growth in the fourth quarter of FY19 slowed down to 5.8% from 6.6% in the previous quarter, the slowest quarterly GDP growth rate in five years.
MONETARY POLICY STANCE
The RBI is expected to retain its accommodative stance in the August policy, and economists and treasurers believe its commentary will turn more dovish. Harihar Krishnamoorthy, head of treasury operations at FirstRand Bank, said that since the liquidity surplus is at ₹1.5-2 lakh crore, the central bank might say it has pumped in enough liquidity and will continue to do as much as needed. According to RBI data, the system liquidity stood at a surplus of ₹2.13 lakh crore as on August 5 . The central bank could also release its liquidity management framework after it set up a working group to simplify the current framework.
While inflation as measured by the consumer price index (CPI) rose to 3.18% in June, it remains below RBI’s medium-term target of 4%. However, the trajectory of inflation in India depends substantially on the monsoon as food prices have a 46% weightage while calculating CPI. In the June policy, the MPC had revised its inflation forecast to 3-3.1% for the first six months of FY20 and to 3.4-3.7% for the second half. According to Aditi Nayar, principal economist, Icra, the unsatisfactory distribution of the monsoon has delayed kharif sowing, which may negatively impact yields and food prices.
GLOBAL FACTORS INFLUENCING THE MPC’S DECISION
The MPC will also consider the current global scenario to arrive at a decision. These include the ongoing trade war between the US and China which has escalated since the last MPC meeting in June. The latest round includes a fresh set of tariffs slapped on Chinese goods by the US. Meanwhile, the US has also labelled China a currency manipulator, a move largely seen as symbolic by experts amid the ongoing trade war.
First Published: Aug 07, 2019 10:48 IST