RBI Likely To Cut Rates After Retail Inflation Hits A Record Low

The Reserve Bank of India (RBI) may cut interest rates by 25 basis points on Wednesday after retail inflation hit a record low in June, economists say. Eleven out of 15 economists surveyed by Mint expect the RBI’s monetary policy committee (MPC) to take the plunge and cut the repo rate, the rate at which the central bank infuses liquidity in the banking system. A basis point is one-hundredth of a percentage point.

“At the August 2 meeting, we expect the RBI to cut rates by 25 bps but maintain its neutral policy stance,” said a Morgan Stanley report dated 26 July.

The Indian economy has been struggling with the country’s gross domestic product (GDP) growth rate slowing to 6.1 per cent in the March quarter because of demonetisation and credit growth to companies has slackened, thanks to bad loans. The June quarter earnings data now also points to a slowdown in some sectors ahead of the introduction of the goods and services tax (GST) on 1 July.

Some economists say it is prudent to wait for these factors to play out rather than going for monetary easing in August.

There is a case to cut rates in October, according to IndusInd Bank chief economist Gaurav Kapur. By then, there would be a clear picture on the short-term impact of GST introduction on growth and inflation, as well the implementation of HRA, especially by state governments. Additionally, there would also be clarity on the surplus liquidity in the banking system, he said.