(MENAFN- IANS)
Mumbai, Aug 3 (IANS) The Reserve Bank is expected to administer another dose of lending rate cuts to boost the revival process from the Covid-19-induced economic downturn.
Economists and industry experts pointed out that despite an elevated level of inflation, growth concerns will necessitate the RBI's Monetary Policy Committee to go in for another rate cut.
The MPC is expected to release its resolution on the monetary policy after their meet August 4-6.
The easing, if administered, will theoretically allow commercial banks to reduce their lending rates, thereby, helping both consumers and the industry to get cheaper finance.
Subsequently, the increased money flow in the hands of consumers will help to boost sales and demand, and for the industry, provide for higher capital investment on the back of lower cost.
Nonetheless, the retail inflation data has been at an elevated level during June, and this might be a key factor for dissuading the MPC from going in for a large rate cut.
"It would be a tough decision for the MPC, as inflation has risen on account of supply chain disruption. 'Life and Livelihood' - both are at stake," Sunil Kumar Sinha, Principal Economist, India Ratings & Research, told IANS.
"However, we reckon that the accommodative stance will be maintained."
Data showed that India's June retail inflation stood at an elevated level.
The retail or consumer price index stood at 6.09 per cent in June. The urban CPI stood at 5.91 per cent and rural at 6.20 per cent.
As per the data, retail inflation level has reached the upper limit of the medium-term CPI inflation target of 4 per cent. The target is set within a band of +/- 2 per cent.
Suman Chowdhury, Chief Analytical Officer at Acuite Ratings and Research, said: "It is unlikely that further rate cuts may help much to revive household demand or private consumption expenditure at this juncture. Nevertheless, the MPC may seriously consider another round of rate cuts to signal its intent to address the increased growth concerns and provide comfort to the volatile markets."
"While food inflation had persisted at high levels in April-May due to the lockdown-driven supply bottlenecks, the CPI print for June 2020 has started to reflect a declining trajectory and we expect a further reduction as the supply pressures ease and the benefits of healthy agricultural growth reaches out to the consumers. The risks of any significant uptick in core inflation may also get largely offset by a very gradual pickup in consumption demand. Therefore, we don't expect near term inflation concerns to be a major constraint in the MPC rate cut decision. At the same time, it is clear that we are near to the bottom of the rate cut cycle."
M. Govind Rao, Chief Economic Advisor, Brickwork Ratings, however, said: "With the rising inflation outlook and prevailing uncertainty over the growth outlook, BWR expects the RBI MPC to adopt a wait-and-watch approach and hold the repo rate at 4 per cent and continue with its accommodative monetary policy stance in its August meeting.
"Furthermore, we expect the RBI to use its other liquidity tools such as OMOs and LTROs wisely and cautiously so that once the situation normalises and economic activities resume, it has enough armour to help bring the economy back on track and also support the government to manage the restrained fiscal situation."
Besides inflation, other economic indicators showed decline in production, and demand and in essence, no revival of economic growth due to localised lockdowns, supply chain disruptions and labour supply mismatches.
The latest macro-data points including Index of Eight Core Industries and Index of Industrial Production have shown easing in the downward trend, but they still remain deep in the red on a YoY basis.
Consequently, few rating agencies have revised downwards their forecast of India's 2020-21 GDP contraction to 10 per cent from an earlier estimate of 5 per cent.
"We expect a further cut of 25 basis points in the 'Repo Rate' and 35 basis points in the 'Reverse Repo Rate' during the upcoming monetary policy review, as the timing is opportune for swift transmission," said Aditi Nayar, Principal Economist, ICRA.
"The MPC had earlier indicated that there is additional space for further rate cuts to support growth. Since then, the growth scenario has only worsened. Although inflation exceeds the target range, we expect it to moderate in a couple of months. In the current scenario, front loading of rate cuts will aid in swift transmission by the banking system."
Earlier this month, a SBI Ecowrap report said there is adequate scope for repo rate to decline by at least 100 basis points from the current levels.
In terms of the industry's perspective, Sridhar V, Partner, Grant Thornton India LLP: "Rate cut, if any, expected to be announced by RBI could only offer another instance of a lifeline for the industry... however, whether it will open up flood gates of demand is a question in mind."
On May 22, the RBI's MPC had reduced lending rates and extended the moratorium period for interest payments on term loans to mitigate the combined impact of demand compression and supply-side disruption on account of the Covid-19 pandemic.
The MPC that time reduced the repo rate by 40 basis points to 4 per cent from 4.40 per cent.
Consequently, the reverse repo rate has automatically been reduced to 3.35 per cent from 3.75 per cent.
--IANS
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