New Delhi: The first monetary policy announcement on Thursday by the Reserve Bank of India in the new Narendra Modi government is expected to be more supportive of economic growth, which has fallen to a five-year low in 2018-19, than choosing to stay within its inflation targeting mandate.
While the consensus on the street is for a 25 basis point cut in the key policy repo rate when the monetary policy committee (MPC) announced its decision on Thursday after a three-day meeting, some economists expect the reduction could be as deep as 35 basis points to get the economy going again.
Repo rate is the rate at which the RBI lends money to the banks for a short term. When the repo rate is reduced, borrowing from RBI becomes more cheaper.
The official data released last week showed India’s GDP growth declined for the fourth consecutive quarter in January-March to come in at 5.8%. The growth rate for 2018-19 as a whole was also a five-year low at 6.8%. Unemployment was at a 45-year high of 6.1%.
Eight of 11 economists polled by DH expect MPC to hand out a 25 bps cut on the policy repo rate. Three of the eight believe that the central bank may go in for a cut in excess of 25 bps.
If the central bank, headed by Governor Shaktikanta Das, reduces the repo rate by 25 bps, it would come down to a multi-year low of 5.75%.
Das, who has given two consecutive rate cuts totalling 50 bps in his nearly six-month-old career as the RBI Governor, may break with the conventional 25 bps cut and take some unprecedented steps to tackle low inflation and slowing growth.
Das had recently suggested that the repo rate cuts need not be in the multiples of 25 bps. They should, in fact, be based on the amount of propulsion an economy needed
Soumya Kanti Ghosh, State Bank of India’s group chief economic adviser, said in a report last week that he saw the repo rate being cut by 35-50 bps.
Brokerage Motilal Oswal has even suggested that the RBI may also announce liquidity enhancing QE-like (quantitative easing) measures along with an upto 50 basis points rate cut.
There is a strong demand that the RBI should provide a special refinance window for NBFCs to support the troubled sector and infuse sufficient liquidity into the system so that the deficit on liquidity adjustment facility (LAF) window turns into surplus.