RBI can cut interest rates again to support growth

New Delhi, December 1 () The Reserve Bank may reduce interest rates for the sixth time in a row on December 5 to support the growth that has continued to decline to more than six years in the fall of manufacturing, bankers and experts

RBI has reduced interest rates on each occasion that the multi-member monetary policy committee (MPC) has met since Shaktikanta Das assumed the position of RBI Governor last December.

In five reductions so far in 2019, interest rates have been reduced by a total of 135 basis points because of the concern that the growth momentum is slowing and also to try to boost liquidity in the financial system.

GDP growth slowed sharply at a rate of 4.5 percent in July-September, affected by a fall in manufacturing production, which contracted 1.0 percent. The pace of GDP growth has moderated from the 5 percent rate in April-June and 7 percent in the July-September 2018 quarter.

Das had previously stated that interest rates will be reduced until growth revives and this gives confidence that interest rates could be reduced at the end of the three-day monetary policy review beginning December 3, a banker said. You don't want to be identified.

Since the RBI Monetary Policy Committee decided to maintain an accommodative stance after its rate cut in October, more cuts may be made if economic conditions remain weak, said Rajiv Biswas, chief Asia Pacific economist at IHS Markit .

The fall in the GDP growth rate was despite a series of new fiscal policy measures, including a large reduction in the basic corporate tax rate in an attempt to boost private sector investment.

Rumki Majumdar, Economist, Deloitte India, said inflation is low and is expected to remain so due to excess capacity in the economy. This gives the RBI the margin to reduce rates, which is highly anticipated at the next December meeting.

In doing so, RBI can look beyond the recent rise in inflation last month, largely attributed to vegetables such as onions. But most importantly, there has been a fall in core inflation.

The chief economist of Motilal Oswal Financial Services Ltd, Nikhil Gupta, said: We fear that expectations of better growth in 3TF20 (October-December) may not work. The main indicators suggest that October (festival month) was the worst in the current cycle. We believe that growth could weaken further to around 4 percent in 3TF20, which will mark depression.

Our year-round growth forecast, therefore, is revised down from 5.7 percent before 4.5 percent for fiscal year 20, he said.

Ranen Banerjee, Public Finance and Economy Leader, PwC India, said the second quarter GDP figures made it more imperative for a led fiscal preparation since monetary policy interventions are clearly not transmitted.

Therefore, just relying on another rate cut by RBI at the next MPC meeting may not be enough. The situation requires coordinated fiscal preparation in areas with higher multipliers and where expenditures could be immediately combined with a monetary policy boost to address the effective transmission of rate cuts to NBFCs. The effect of the increase in rural demand on third-quarter numbers will be crucial to avoid an annual growth rate of less than 5 percent, Banerjee said.

Sreejith Balasubramanian, Economist - Fund Management, IDFC AMC said that the growth of the fund could be ahead and that the recovery is unlikely to be V-shaped since consumer demand, credit supply and risk appetite They remain mediocre.

This and the fall in the underlying CPI should allow the RBI to focus more on growth, while a large fiscal stimulus is hampered by the lack of financial savings available to households, he said.

Rajni Thakur, an economist, RBL Bank said that growth in the second half of the year could be elusive unless the government generates more stimuli and continues to drive growth during the fiscal year.

The routine will be slow and will depend largely on the fiscal support that comes out of the current growth recession.

Majumdar said aggressive asset sales and privatization reforms will give the government some fiscal space to incur countercyclical fiscal policies to boost growth without expanding the fiscal deficit.

In the face of the sharp slowdown in the momentum of economic growth, the Indian government should give high priority to the implementation of additional measures to boost manufacturing production and start up an uptick in the investment cycle.

Accelerated government spending on infrastructure projects such as roads, railroads and ports, as well as urban infrastructure such as affordable housing and hospitals, are the type of fiscal policy measures that could help revive the momentum of economic growth in a relatively short time, said Biswas said. While the RBI has been helping through its monetary policy easing measures, the impact is likely to be longer, since the effects of the monetary policy stimulus on the real economy generally act with long delays, he said. ANZ MR MR

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