RBI expected to cut rates on December 5

Times of India 02/12/2019

MUMBAI: The Reserve Bank of India (RBI) is widely expected to cut interest rates in the forthcoming monetary policy review on December 5. However, the bad news is that market participants expect that the government will overshoot its fiscal deficit target, which will push bond yields high and keep a check on any rate cut being transmitted to the bond markets.

A majority of economists polled by TOI expect the RBI to cut its repo rate — at which the regulator lends to banks — by 25 basis points (100bps = 1 percentage point) to 4.9%. A cut in the repo rate would, however, be immediately transmitted to retail borrowers as the RBI has forced banks to link loans to an external benchmark instead of a self-determined reference rate. Most banks have chosen the RBI’s repo as a benchmark, which means that home loans could fall to below 8%.

In his last policy, RBI governor Shaktikanta Das had said that the central bank was willing to keep rates soft for as long as it takes to revive the economy. Given that the growth numbers that came in last week were at a six-year low, there is enough reason for the RBI to keep the policy accommodative.

However, the fiscal deficit numbers for the first seven months have surpassed budgeted levels and stand at 102% of the annual target. There is also no clear communication from the government whether it is willing to abandon the fiscal deficit target in favour of a stimulus. However, government officials have pointed out that there is still scope to come back and stay within the target considering that last year, the fiscal deficit for the first seven months was almost 104% of the budget but recovered later.

“Based on the shortfalls in GST and corporation tax collections and the lower-than-estimated growth in GDP in the first half of 2019-20, we estimate the gross fiscal deficit for the year to be in the range of 4.1-4.3%,” said Care chief economist Madan Sabnavis.

Besides fiscal deficit, there are also concerns of inflation driven partly by the onion shortage, which has seen prices cross Rs 100 per kg in some markets. But despite pressures from inflation and the fisc, most economists expect that Das will cut rates in the forthcoming policy.

“Higher onion prices aggravate the base effect of inflation dipping to 2.3% in November 2018 from 3.3% in October. That said, fundamental drivers of inflation remain in check — growth is weak, rivers filled up to water winter sowing, ‘imported’ inflation soft and fiscal risks contained. On balance, we advise investors to look through higher consumer inflation as it is driven by a temporary onion price spike and base effects. We continue to expect the RBI monetary policy committee to cut policy rates by 25 bps on December 5 with growth slipping on rising real lending rates,” DSP Merrill Lynch’s India economist Indranil Sen Gupta said in a report.