The worsening economic conditions in the country might just result in the Reserve Bank of India (RBI) rolling out a sixth consecutive rate cut in its upcoming policy review meeting which is scheduled to be held on 5 December 2019. RBI’s rate cut is considered as an economic booster.
The anticipation of another rate cut is coming on the back of a report showing GDP growth plummeting to as low as 4.5% for the quarter ended in September 2019. The GDP has fallen beyond 5% for the first time since the year 2013. The RBI has already cut 135 basis points this calendar year over five meetings so far.
The RBI’s decision to roll out five interest rate cuts this calendar year so far is the most by an Asian Central Bank. Another cut in the interest rate would make RBI cutting interest rate in all its policy review meeting this calendar year. The focus of the government and RBI is firmly on boosting the economic growth of the country this year.
The global economic slowdown has been prevalent for almost a year now. Adding to that is the reduced consumption which has put the manufacturing sector into total disarray. The trade between the United States and China has only worsened the condition. All these have combined with haunting the Indian economic growth this year.
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The previous quarter growth has been on the downside and is reflecting a drop in investments and overall manufacturing. Retail and private consumption has been fairly low this year, and it is only the government spending which has been positive for India’s economy.
Numerous high-frequency indicators had hinted at slowdown extending into October. This may push the RBI to lower its growth prediction for the current financial year from 6.1%. This may just force RBI to roll out another cut in the interest rate so as to boost consumption.
The RBI was earlier expected to announce a reduction of 25 basis points in the interest rate, but the latest developments in the GDP growth value can lead to RBI rolling out a cut of 45 to 50 basis points. A rate cut of such extent will result in banks and NBFCs, lowering the transmission interest rate to the customers.
Corporates have held back from investing and have preferred to use the same to service their ongoing debt. Weak growth and expansion of companies have resulted in job losses, and the unemployment rate has hit fresh highs of late. Adding to that is, banks not passing on the interest rate cuts to the customers and has resulted in inadequate consumption.
Keeping the existing economic scenario of the country in mind, the RBI may come up with a deep cut in the interest rate, and there should no surprises around it.
For any clarifications/feedback on the topic, please contact the writer at vineeth.nc@cleartax.in
Engineer by qualification, financial writer by choice. I am always open to learning new things.
