Members of the media and other attendees queue at the entrance to the reception of the Reserve Bank of India (RBI) in Mumbai. (Photographer: Prashanth Vishwanathan/Bloomberg)

Economists Divided Over October 4 Rate Cut From The RBI

The Reserve Bank of India’s monetary policy review on Tuesday will see the stamp of Governor Urjit Patel and the Monetary Policy Committee (MPC). After a two-day meeting, the MPC will announce its decision at 2.30 p.m. on October 4. Since the market is still trying to assess the leanings of both Patel and the MPC, economists are split between whether the RBI will cut rates now or later.

Four of 10 respondents in a poll conducted by BloombergQuint indicated that they expect the central bank to cut the repo rate by 25 basis points to 6.25 percent.

The most recent readings on consumer price inflation and industrial production support this view. After a spike in July to 6.07 percent, retail inflation fell more than expected to 5.05 percent in August.

Data on industrial production has been very volatile since the start of the year. In July, the Index of Industrial Production declined 2.4 percent, with the manufacturing sector contracting 3.4 percent. In the previous month, industrial output grew 2.1 percent.

Six of the ten economists polled, however, felt that the RBI will hold off on cutting interest rates till December.

In the second half of the financial year, including the monetary policy review on October 4, three economists anticipate a rate cut of 50 basis points. All the rest believe that the RBI will only cut rates by 25 basis points more this year.

Will Government Bond Yields Fall Further?

At the start of the month, the government issued a new series of 10-year benchmark government bonds at a coupon of 6.97 percent, the lowest yield since 2009. Since then, the yield has fallen further and ended at 6.81 percent on Friday.

“The bond market has likely already priced in a 25 basis point cut,” said Devendra Kumar Pant, chief economist at India Ratings & Research. “I do not anticipate a rate cut in the October 4 policy review, but even if it happens the yields are not going to move much, especially on account of the current liquidity scenario.”

In April this year, the RBI, under then Governor Raghuram Rajan, decided to move system-wide liquidity to neutral from deficit. While liquidity conditions have eased considerably, the RBI is expected to continue with its plan to conduct open market operations and inject long term liquidity into the system.

Half of the respondents in BloombergQuint’s poll expect the 10-year government bond yield to fall further. Nearly all others said that bond yields will remain stable at the current level. Only one respondent projected that the government yield will rise.

Growth-Inflation Dynamics

Concerns about India’s economic growth are unfounded, at least according to the economists polled by BloombergQuint. All 10 respondents expect the Reserve Bank of India to retain its guidance on growth for the current financial year.

The RBI has projected that India’s economy will grow at 7.6 percent this financial year.

Most respondents, that is 60 percent, expect consumer price inflation to trend lower for the remainder of the financial year and remain below 5 percent. In its previous policy statement, the RBI had cautioned about upward risks to its inflation target of 5 percent.

The central bank had said that while food inflation is expected to fall on the back of a good monsoon, a spike in non-food, non-fuel inflation could counteract this positive effect.

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