Wednesday (October 2): India’s central bank has predicted to lower its key lending rate or the repo rate INREPO=ECI by 25 basis points (bps) to 5.15%, which would take cumulative cuts so far this year to 135 bps.
The central bank is expected to cut benchmark interest rates for the fifth time this year.
Some RBI watchers expect a larger cut this week, after it cut the repo rate but an unconventional 35 bps in August.
Indian economy expanded by just 5% in the June quarter, its slowest pace since 2013. That has raised expectations the RBI will be forced to further downgrade its growth projection of 6.9% for the current fiscal year.
Most analysts forecast one more cut of 15 bps in December.
“With current inflation remaining benign, we expect RBI to opt for a 40 bps rate cut at its policy review later this week in a bid to continue its support toward growth revival,” said Yuvika Oberoi, an economist with Yes Bank in Mumbai.
However, not all economists were as aggressive with their rate cut bets, saying the central bank will likely reserve some firepower and wait to see how inflation pans out.
The government in September announced a sharp cut in the corporate tax rate – to 22% from 30% to revive business activity.
“The recent volatility in crude oil prices and the fiscal measures announced by the government will have an impact on inflation in the medium-term and the fiscal deficit,” said Shanti Ekambaram, president of consumer banking at Kotak Mahindra Bank.
“Hence, expect the MPC to be more measured in its response with a rate cut of 20-25 bps,” she added.
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.
India’s banks have passed only a small portion of the RBI’s cuts this year to their customers.
