India’s worsening economic outlook as coronavirus cases soar has raised the chance the central bank will cut interest rates at its policy review on Thursday, in spite of inflationary pressures. Around two-thirds of economists in a Reuters poll expect the Reserve Bank of India (RBI) to cut the repo rate by another 25 basis points (bps) on August 6 to a record low of 3.50 per cent, and once more next quarter.
Apart from rate cuts, Upasna Bharadwaj, economist at Kotak Mahindra Bank, expects liquidity and regulatory measures from the RBI to address demand shocks and financial market dislocations. “RBI may look to widen the policy corridor to 75 bps by easing reverse repo by a higher quantum,” she said, adding that though they expect a 25-bps rate cut, it may not be effective in the current environment.
The RBI has already reduced the repo rate by a total of 115 basis points since February, on top of the 135 basis points in an easing cycle last year, from 6.50 per cent, responding to slowing growth.Some economists, however, feel it may be prudent for the RBI to pause in August before resuming its rate-cutting cycle once inflation has stabilised. Weakness in growth versus above-target inflation, improving indicators and concerns over inflation expectations will put the RBI in a tough spot, said DBS economist Radhika Rao.
“It will be a close call, but we see slightly higher odds for a pause.”