RBI Policy preview: MPC likely to cut repo rate by 25 basis points on growth concerns

Reserve Bank of India (RBI) Governor Shaktikanta Das

The Monetary Policy Committee (MPC) scheduled to meet from December 3-5 is expected to continue on the path of interest rate easing in order to support the country's weakening economic growth.

The Reserve Bank of India (RBI) is also expected to cut its GDP growth estimates in light of second-quarter data released last week. The central bank had cut this year's GDP growth estimate by 80 basis points in the previous policy review to 6.1 percent.

The dismal GDP growth in July-September quarter, read in line with the MPC's decision to stay accommodative for "as long as it is necessary to revive growth" from October policy review, makes a case for the sixth consecutive rate cut this year.

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.

"India’s manufacturing and industrial sectors have been witnessing a slowdown along with fall in consumer demand, private investment and global slowdown. Thus, to revive growth we expect RBI to again cut repo rate by 25 bps on December 5," said Rahul Gupta, Head of Research-Currency, Emkay Global Financial Services.

"After 135 basis rate cut delivered by the RBI since February 2019, we expect the RBI to cut rates by an additional 25 bps in December, taking the repo rate to 4.9 percent," said Amar Ambani, Senior President and Head of Research – Institutional Equities, YES Securities.

India's economic growth fell to over six-year low of 4.5 percent in the July-September quarter, the latest GDP data showed. This is the first time in seven years that the country's GDP growth has fallen below the 5 percent mark.

While there has been an uptick in Consumer Price Index (CPI) or retail inflation, it is unlikely to affect the MPC's rate cut decision. The central bank may, however, again look at revising its estimates on both-growth as well as inflation outlook in the December policy review.

"We note that GDP growth print is around 80 bps lower and 2HFY20 GDP growth could be around 150-200 bps lower than RBI’s current estimates. On the other hand, CPI inflation could be around 100-150 bps higher than RBI’s estimate for 3QFY20," said Suvodeep Rakshit, Vice President & Senior Economist, Kotak Institutional Equities.

The December policy will, in some sense, test the “flexible” portion of the flexible inflation targeting framework, Rakshit added.

In October, India's CPI inflation rose to a 16-month high of 4.62 percent on higher food prices. However, core inflation continued to ease, which may give room to RBI Governor Shaktikanta Das to vote for a rate cut. The MPC's medium-term target for CPI inflation is 4 (+/- 2) percent while supporting growth.

"The MPC should look through CPI inflation rising to 5.2 percent in November and 4.7 percent in Nov-Feb, beyond the RBI's 3.5-3.7 percent 2HFY20 projection, on the onion price spike/base effects," said economists Indranil Sen Gupta and Aastha Gudwani, Bank of America Merrill Lynch. They expect MPC to cut the policy rate by 25 basis points in December and 15 basis points in the following policy review.