Reserve Bank likely to go for 35 bps rate cut as inflation within its comfort range: Report

Mumbai: The Reserve Bank will go for an unconventional 0.35 percent cut in its key lending rate at the forthcoming review on Thursday as inflation is within its comfort range.

It can be noted that since Governor Shaktikanta Das has assumed office, the central bank has cut its key rates by a cumulative 0.50 percent as inflation ebbed.

A wide set of analysts expect the RBI to cut rates by 0.25 per cent at Thursday review, primarily to address worries on growth, which has dipped to a 5-year-low of 5.8 percent for the March quarter.

Headline inflation, however, has risen sharply to 2.92 percent in April.

 Reserve Bank likely to go for 35 bps rate cut as inflation within its comfort range: Report

Representational image. Reuters.

While expecting the 0.35 percent cut, analysts at the foreign brokerage Bank of America Merrill Lynch said they expect the headline inflation to rise to 3.3 percent in May, but added that it is within the 2-6 percent range which the government has set for the RBI.

It added that risks on the fiscal deficit and currency front are also fading with Prime Minister Narendra Modi’s re-election, which will help for a deeper cut than the 0.25 percent consensus, in line with Das’ speech in New York last month which made a mention of unconventional cuts not in 0.25 percent or multiples.

It added that the Modi government has shown fiscal discipline by not competing with the opposition Congress’ social security scheme which would have entailed expenditure of 1.9 percent of GDP.

The brokerage also said that the transmission to lending rate cuts to prop up growth “needs sustained RBI easing”, it said.

The brokerage said its activity indicator also signals weakness for 1-2 quarters more, but added that the growth can be pushed up to 7.5 percent in FY20 if the RBI cuts rates by 0.50 percent and also if the state-run lenders are adequately recapitalised using the excess RBI capital identified by the Bimal Jalan report.

The US Federal Reserve has also turned dovish, with the US-China trade war dragging on, the note said.

Updated Date: Jun 04, 2019 19:29:22 IST

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