RBI To Opt For Further Rate Cut

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RBI To Opt For Further Rate Cut
Rajat Mishra - 30 November 2019

New Delhi, November 30: As the Indian economy is witnessing an unprecedented slowdown, many are raising concerns of a recession. Everyone is looking up to the Reserve Bank Of India (RBI) as the Monetary Policy Committee meeting is scheduled to take place on December 5, 2019.

In the last two meetings, the RBI under the stewardship of Governor Shaktikanta Das had reduced the repo rate by 25 basis points (bps) three times in a row to stimulate consumption and investment.

However, speculations are rife that this time too, the RBI will go for a fourth rate cut between 25 to 50 bps.

In the last monetary policy meeting held in July, the RBI changed its stance from neutral to ‘accommodative,’ signalling that the RBI can go for another rate cut. After the rate cut in July, the repo rate came down to 5.75 per cent, lowest in the last 9 years. And with the expectation of further rate cut, there is a huge possibility that repo rate will come down between 5.25 and 5.50 per cent.

The International Monetary Fund (IMF) also cut down on India’s growth projections by 30 bps to 7 per cent, citing weaker than expected outlook for domestic demand. The IMF also cut its forecast for world economic growth by 10 bps to 3.2 per cent in 2019. Many sectors in India are reeling under huge distress, like the automobile sector is grappling with the slowdown in India’s vehicle segment and is witnessing the sharpest decline in its sales.

After taking into consideration, local and global situation, it is reasonable to expect a rate cut by the RBI in order to ensure positive liquidity.

According to some experts, the recent announcement by the Indian Meteorological Department, which has recently forecast a much lower monsoon deficit, paves the way for 25 bps rate cut by the RBI. Meanwhile, Bank of America Merrill Lynch said in a report that a deficient monsoon will stoke agricultural inflation in the second half of 2019. Despite the government's good record of supply-side management, as a 5 per cent swing in agri prices impacts Consumer Price Index inflation by 250 bps.

It would be interesting to see what key decisions would be taken by the RBI in its monetary policy meeting in order to stimulate consumption and to ensure liquidity in the market.

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