RBI Rate Cut Cycle Seen Pausing After December Monetary Policy

The Reserve Bank of India is likely to cap off its rate-cutting cycle in the December monetary policy with another 25-basis-point reduction, a global brokerage has said in a report.

On Friday, India’s Monetary Policy Committee reduced the benckmark repo rate by 25 basis points to 5.15 percent. It maintained its policy stance as “accomdative”, at a time RBI believes the near-term outlook for the economy is “fraught with risks”.

"We see a high probability for the RBI MPC to deliver a final 25-basis-point cut to bring the repo rate to 4.9 percent in December. It would be consistent with our forecasts of an additional rate cut by the (US) Fed in October," Goldman Sachs Group Inc. said in a report after Friday's RBI rate cut.

The brokerage expects the easing cycle to pause after the December policy as India’s retail inflation rate is inching towards the 4 percent mark, the upper end of RBI’s comfort zone. The MPC may also want to wait and watch the monetary easing cycle, as well as the series of government’s economic reforms, percolate through the economy.

"What would it take for the RBI to pause or end the easing cycle before the December meeting? We suspect it would require better high frequency data on economic activity, and a significant improvement in the global environment.

"In fact, we see risks skewed in the other direction. Alternatively, if headline inflation prints cross 4 percent, driven by a pick-up in food or oil prices, that would also increase the chances of a pause after the October meeting," Goldman Sachs said.

Friday's repo rate cut was the fifth in the row in 2019, bringing down the benchmark by 135 basis points so far this year.