RBI to cut interest rates - We think so!

Markets have bounced back nicely after recent steep price fall in the indices. All eyes will be on the Reserve Bank of India’s monetary policy committee (MPC) statement tomorrow. Will RBI cut interest rates tomorrow or will it hold its decision to cut rates , is something punters will be speculating on.

We think it is right time to cut interest rates, at least by 0.25 per cent or 25 basis points. This rate cut decision will be help government to put the economic growth engine on track.

The major concern currently for government and RBI is sagging economic growth-falling to a three year low of 5.7 per cent- due to two major structural reforms: Demonetization and GST. Although, the slowdown due to implementation of GST is not totally unexpected, the growth pains are likely to persist for a few more quarters.

RBI should cut policy interest rates once again this week to lend support to the weakening economy, though the consensus view is that it will maintain the status quo as inflation has bottomed out. RBI will also consider the fact that core consumer price index inflation has climbed back above 4 per cent whereas the probability of fiscal slippage has increased.

Also, the Rupee has weakened amid higher oil prices and increased geopolitical risks. The easy liquidity condition and reduction in cost of liabilities will ensure competitive reduction in lending rates and hence better transmission.

In our view, there is a space for a 25 basis point rate cut to 5.75 percent which would boost the confidence in the economy. Even if not in October, the rate cut looks inevitable in its December policy review. The market will keenly watch the MPC members’ view on the same.

In its last policy review in August, the RBI had reduced the repo rate by 0.25 percent to 6 percent. The rate cut was the first in 10 months bringing policy rates to a near seven-year low.