Economic expansion and inflation forecasts for the current fiscal have been lowered by the Reserve Bank of India (RBI) after the growth rate fell to a five-year low, but a 25-basis-point policy rate cut has raised questions on whether the action is enough to lift investments.
With monetary transmission remaining less than half for the first two rate cuts this year amid weakening investment andNSE 0.54 % falling consumption demand, the market is seeking more impetus for growth.
“A 25-bps repo rate cut along with the change in policy stance to accommodative may mean that over a period of two months, we might get a total of 50 bps cut including the current one,” said B Prasanna, group head for global markets at ICICI BankNSE 1.32 %. “Besides, if RBI decides to keep liquidity positive then that would act as a catalyst for the economy. This would prompt banks in aggressively buying assets with the surplus money leading to better transmission in money market rates, fuelling higher corporate investment.”
The benchmark 10-year bond yield has closed lower at 6.93 per cent from an intra-day high of 7.012 per cent.
HDFC BankNSE 0.75 % chief economist Abheek Barua said the announcement of a committee to review the liquidity framework could trigger yield movement toward 6.8 per cent in the short term. “Global growth worries, increasing expectations of a rate cut from the US Federal Reserve, and decline in the oil prices could also support the momentum trade toward 6.8 per cent in our view,” he said.
State Bank of India chairman Rajnish Kumar said the decision to lower the Basel-III leverage ratio would augment the lendable resources at banks. Besides rate cuts, the RBI will also be focusing on ensuring higher monetary transmission to revive growth.
This is the first time this year that all the Monetary Policy Committee members voted in favour of a 25-basis-point rate cut, and also for a change in the policy stance to accommodative from neutral, in a reflection that falling investments have cast a longer shadow on the economy.
The MPC observed that growth impulses have weakened significantly as reflected in a further widening of the output gap compared to the April policy. “A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern,” the RBI said.
The central bank has lowered its GDP projection for FY20 by 20 basis points to 7 per cent while the path of CPI inflation is revised upward to 3-3.1 per cent for first half of the fiscal from 2.9-3 per cent and revised downward for the second half to 3.4-3.7 per cent from 3.5-3.8 per cent projected earlier.
“Although headline inflation is expected to remain contained in the first half, we expect it to harden in the second half. Further, we believe that real GDP growth will weaken further to about 6.5 per cent in FY20,” said Nikhil Gupta, chief economist at Motilal Oswal Financial Services