RBI to Reduce interest rates in June post 3rd meeting

1. The Reserve Bank of India will reduce the interest rates at the third meeting in a row as per a Reuters poll of 66 economists.

2. Governor Shaktikanta Das took over as RBI governor from Urjit Patel in December 2018. The central bank delivered rate cuts at its previous two meetings – February and April.

Two-thirds of the total number of economists estimated that the RBI will cut its repo rate by 25 basis points during its June meeting, bringing it to 5.75% – the lowest since July 2010. It is predicted to keep its policy on hold until the end of 2020. Prior to this, the central bank cut rates three times in a row in 2013.

The recent poll results, taken from May 23 to May 28, were noticeably different from a poll conducted a month back, where economists expected the RBI to hold rates at the current 6% until October 2020.

“Further interest rate cuts in India look only a matter of time after headline inflation in April came in below target,” said Shilan Shah, senior India economist at Capital Economics. “However, we think that monetary loosening is a policy mistake, as we expect underlying inflation to rise again soon.”

Since retail inflation was below the central bank’s mid-term target of 4% for the ninth successive month in April, it is estimated to breach that level in the final quarter of 2019, a separate Reuters poll showed.

Of the almost 60 contributors who had a view on RBI rate plan this year, under half had rate estimations prepared for 2020. A larger part of that sample rates will be on hold until the end of 2020 post a cut next month.

But, when asked what the RBI ought to do this year, as opposed to what it would do, business analysts were divided, with 19 patrons saying it should hold rates and 18 saying it should ease. Just a single financial analyst said it should raise rates.

The median forecast in the most recent Reuters poll showed the economy was likely to have grown 6.3% in the January-March quarter, a sluggish annualised pace in almost two years.

If this is correct, India will lose its title as the fastest-growing major economy in one and a half years. China’s economy grew by 6.4% during the same period.

“The independence (of the RBI) was already compromised late last year. Going by the government pressure, we might get a rate cut again. There is more than 50% probability of that kind of outcome,” said Prakash Sakpal, Asia economist at ING.