RBI may cut repo rate for 5th straight time to boost economy

The Reserve Bank of India (RBI) could cut its benchmark interest rates for the fifth time this year on Friday in another measure to boost a sluggish economy as inflation remains in a comfortable zone.

RBI’s six-member Monetary Policy Committee (MPC) is scheduled to announce the fourth bi-monthly policy for 2019-20 on Friday, after a three-day meeting.

Reuters said RBI is predicted to lower its key lending rate or the repo rate by 25 basis points (bps) to 5.15%, taking the cumulative cuts so far this year to 135 bps.

It also said that some RBI watchers expect a larger cut this week, after the central bank cut the repo rate by an unconventional 35 bps to 5.40% in August.

A Bloomberg poll of 25 economists showed that a 25 bps cut to 5.15% in the repo rate is widely expected.

India, Asia’s third-largest economy, grew by just 5% in the June quarter, in the slowest pace since 2013.

The government has already announced a series of measures, including a steep cut in corporate tax and rollback of enhanced surcharge on Foreign Portfolio Investors, among others to jump-start growth.

The MPC meeting comes in the backdrop of RBI’s mandate to banks to link their loan products to an external benchmark, like repo rate, for faster transmission of reduction in policy rates to borrowers, from October 1.

Inflation in August accelerated to a 10-month high but remained well below the central bank’s medium-term target of 4% for a 13th straight month. Retail inflation inched up to 3.21% in August.

The government has mandated RBI to ensure that inflation remains below 4%, with a deviation of 2% on either side.

Policymakers are drawing solace from the fact that retail inflation remains in RBI’s target even though economic activities are showing signs of sluggishness.

Traders will focus on the wording and tone of the monetary policy statement for clues on further easing if the RBI delivers cut as expected.

Economists also said the policy transmission process could improve after the RBI mandated banks to link all fresh loans to an external benchmark like the repo rate or the rate on short-term treasury bills since the start of this month.

Banks have passed only a small portion of the RBI’s cuts this year to customers.

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