If RBI cuts rate by 25 basis points, repo to be lowest in almost 10 years

If the Reserve Bank of India (RBI) decides to trim the rate by a further 25 basis points on December 5 to 4.9% —
a move that is widely expected — it would touch the lowest levels since March 2010.

The repo rate is the rate at which RBI lends to banks. Currently, it stands at 5.15% after the central bank reduced the rate by 25 basis points in the October monetary policy.

CARE Ratings said in a report that in case the monetary policy committee (MPC) cuts the policy rates by 25 bps in the current policy, it would hold policy rates in the February policy and track the efficacy of interest rate transmission and its impact on economic growth. “RBI will maintain its accommodative stance keeping the persistent economic slowdown in the background,” it said.

Independent market expert Gopikrishnan MS points out there was a time earlier this year when growth was slowing down and inflation was stable around 3%, that presented conducive conditions for cutting rates. “However, inflation is currently at a level where it cannot be taken for granted despite the fact that core inflation and growth has fallen significantly. Moreover, falling revenue collections imply fiscal deficit concerns are going to stay. So, there is very little RBI can do in terms of rate cut and I believe they may cut the repo by another 15-25 bps in the upcoming monetary policy. I think this is the bottom,” he said.

RBI has so far reduced the repo by 135 basis points this year. However, despite the rate cut of this magnitude, the transmission of rates has been quite limited and has remained a cause of concern. The central bank had also indicated in its October policy statement that monetary transmission has remained staggered and incomplete.

“Against the cumulative policy repo rate reduction of 110 bps during February-August 2019, the weighted average lending rate (WALR) on fresh rupee loans of commercial banks declined by 29 bps. However, the WALR on outstanding rupee loans increased by 7 bps during the same period,” RBI said.

Gopikrishnan further points out that liquidity is very high but banks are not lending enough as they are still risk averse. “The slow transmission also indicates banks are trying to preserve their margins. In such a scenario, another rate cut may not lead to any significant positive outcomes,” he said.

Lakshmi Iyer, chief investment officer (debt) and head products at Kotak Mahindra AMC, says the MPC meeting this time is set against an interesting backdrop —rising CPI data and a falling GDP growth.

“Super-impose easing interest rates across the globe, further aggravates the situation. However, the high real rates in India suggest a case for further easing given that CPI rise is largely food prices driven. This tug of war, in our view, may pave way for an additional rate cut in the upcoming policy,” she said.