Will RBI cut rate by 25bps or more?

RBI has cut interest rates on every single occasion that the monetary policy committee (MPC) has met since Shaktikanta Das took over as the RBI governor last December.

In five reductions so far in 2019, interest rates have been lowered by a total of 135 basis points. The RBI governor had said that the central bank was willing to keep rates soft till the economy revives.

The forthcoming monetary policy review (5th December) comes against the backdrop of sharp deceleration in economic growth on one hand and rising inflation on the other.

While inflation has inched higher to over 4%, it is mainly due to temporary factors (spike in vegetable prices), rather than the onset of an inflationary dynamic. Thus it is unlikely that inflation will be a major concern for the monetary policy committee.

If there is a cut in the repo, it will be transmitted directly to retail borrowers as RBI has instructed banks to follow an external benchmark. Most have chosen the repo rate.

Keeping all these factors in mind, a 25–50 bps rate cut in the forthcoming policy seems reasonable. If last time’s stance is any cue, a 35bps cut would be the best middle path for the committee to consider.

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