New Delhi: As the Reserve Bank of India meets on Wednesday to decide on interest rate after two days of deliberations by the Monetary Policy Committee, all eyes will be on Governor Urjit Patel’s announcement at 2.30 pm.
The dominant market view is for a 25 basis point (BPS) rate cut. In a Bloomberg survey, 40 of 56 economists expected the central bank to cut the repurchase rate from 6.25% to 6%. A Reuters poll also found the same number (40 of 56) predicting the same quantum of rate cut.
The RBI’s repurchase rate is the benchmark interest rate for the Indian economy and is tied to the money supply. All kinds of loans (car, home, student) are affected by a change in the repo rate.
The market view for a rate cut is simple: Inflation is at a 5-year low and economic growth has slowed, necessitating the need for lower borrowing costs to give a fillip to demand. Further, a normal monsoon, record foodgrain production and moderating farm prices mean that the threat of food inflation, which makes up nearly 50% of the overall inflation basket, is minimal.
Some market participants are even predicting that the RBI may cut interest rates by as much as half a percentage point, to 5.75%. Such economists might be a silent minority but their view is that a 25 BPS cut may not have a significant impact on the borrowing activity, but a 50 BPS cut will give a visible boost to liquidity in economy.
However, some economists warn against such largesse. Equity markets are at an all-time high. The Bombay Stock Exchange’s Sensex and the National Stock Exchange’s Nifty are scaling record highs every day. An inflow of domestic and foreign money is propelling the froth in the markets. In such a scenario, an interest rate cut, which may be targeted at boosting borrowings and revival of industries and real estate market, could end up in an equity market bubble.
“Banks currently don’t have the money to lend for investment growth and a rate cut will merely hasten the flow of capital to equity markets, defeating the purpose of kickstarting the investment cycle,” Pronab Sen, the former Secretary of the Statistics Ministry told News18. In such a situation, Sen opined, the RBI should not cut interest rates.
However, apart from frothy markets there are other threats on the horizon. Bhanumurthy, an economist with the NIPFP, said that going forward the effect of the 7th Pay Commission, loan waivers and the increase in foreign money flooding into India could raise inflation, which the RBI would prefer to head off by holding borrowing costs constant.
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