RBI running out of ammunition with the repo rate set to fall

The Reserve Bank of India will cut the repo rate next week, according to 82% of economists (9/11) in Finder’s RBI repo rate forecast report. The majority of those predicting a cut expect a 25 basis point drop.

However 40% (4/10) are actually in favour of a hold decision and 38% say the rate has already reached its effective lower bound.

Chief Economist at IDFC First Bank, Indranil Pan, believes the RBI will and should cut the rate, despite saying the “effectiveness of monetary policy is reducing with every rate cut as there is evidence of limited transmission.”

“…However, the RBI might not be able to sit quite at this point and a rate cut should be seen as a sentiment booster to the economy,” he said.

Just two panellists, CARE Ratings economist, Rucha Ranadive, and Chairman of Anarock Property Consultants, Anuj Puri, think the rate will hold, both noting an increase in inflation.

“There has been a slight rise in inflation rates in the past few weeks. In this scenario, RBI would consider it better to put the repo rate on ‘hold’,” Puri commented.

Ranadive expanded by saying, “In addition, there is still room for banks to pass on the earlier policy rate cuts as the transmission of rate cuts is improving gradually. At present, the banking system is also in a surplus liquidity position. Thus, this calls for a pause in the rate cut cycle of the RBI.”

Senior economist and statistician at Acuite Ratings, Birabrata Panda, expects a rate cut but thinks the Bank should hold the rate.

“Repo rate is already at the lowest. Moreover, monetary policy is ineffective to stimulate growth,” he said.

While over a third of economists say the rate has reached its effective lower bound, half the panel (50%) thinks there is still room to move.

Economist at Zdaly, Akash Doifode, thinks the Bank can effectively take the rate as low as 2% while others gave responses between 2.75-3.5%.

Despite unprecedented monetary easing economists do not anticipate a return to pre-COVID activity for some time.

56% expect a recovery sometime in 2021 – 34% in the first half of the year and 22% in the second half. Others are less optimistic with one in five (22%) not expecting a recovery until 2022, 11% until 2023 and 11% beyond 2025.

Pan says that while monetary policy has done enough, fiscal policy is lagging, a sentiment shared by Asia Economist at Capital Economics, Darren Aw.

“The coronavirus crisis and the government’s unwillingness to respond adequately to it will leave a legacy of impaired household and corporate balance sheets and a damaged banking sector that will cast a shadow overgrowth for years. With demand weak, we doubt that output in India will return to its pre-virus path for a decade,” Aw said.


You can read the full report, including additional commentary, here: https://www.finder.com/in/rbi-repo-rate-forecast

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Neel Achary is the editor of Business News This Week. He has been covering all the business stories, economy, and corporate stories.