RBI likely to cut rates by 25 bps; may keep door open for further easing

The outcome of the Monetary Policy Committee (MPC), and future outlook on rates will be an important factor to chart the direction of the market in the short term.

Most experts which Moneycontrol spoke to said that the central bank could cut rates by 25 bps and may keep doors open for further easing to support growth in Asia’s third-largest economy.

The dismal GDP growth in the July-September quarter which hit over a 6-year low makes a case for the sixth consecutive rate cut this year, despite the rise in inflation to RBI’s comfort level of 4 percent.

Markets are expecting at least 25 basis points rate cut in the upcoming MPC review. Currently, the key policy rate is at 5.15 percent. One basis point is a hundredth of a percentage point.

“The policy stance we foresee from RBI is cut of repo rate by 25 bps this Thursday and keeping the door open for further easing. If we look at the bond market, they are already pricing easy monetary policy,” Aasif Hirani – Director, Tradebulls Securities told Moneycontrol.

“We acknowledge that reducing policy rate may not necessarily stimulate the growth immediately and fiscal policy will have to do the heavy lifting to boost growth. Sector-specific measures and increased government spending would be the quickest way to boost growth in the near term,” he said.

The major concern which the economy is facing is around slower demand and liquidity issues, and a rate cut from the central bank will help cushion these issues and kickstart the investment cycle, suggest experts.

Consumer spending is very important in terms of smooth economic growth, and with measures taken by the government in the last one month, economic growth should rebound by FY21, suggest experts.

“With weak GDP, slowing demand, low manufacturing data and liquidity crunches are important factors we believe as RBI’s main concern revolves around boosting economic slowdown hence we expect a rate cut,” Jitendra Jitendra Upadhyay, Equity Research Analyst at Bonanza Portfolio Ltd told Moneycontrol.

“To make a meaningful impact on sentiments, it should cut rates by 35 to 40 bps. Government is taking various steps to tackle this slowdown, but none of those initiatives are having a material impact on the economy. We believe in the near-term economy will continue to face headwinds due to subdued domestic demand. However, in the long run, the Indian economy is going to blossom,” he said.

Siddhartha Khemka, Head of Retail Research, Motilal Oswal Financial Services Private Ltd also sees MPC delivering a rate of 25 bps rate cut which is already factored in by the market and thus investors would watch out for any surprise on that front and the commentary on the future path.

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