Three times in a row, will the Reserve Bank of India (RBI) cut the rates once again? Probably yes. RBI is supposed to release the bi-monthly monetary policy on 6th June 2019. A majority believe that RBI might cut 25 bps from the repo rate.
Understanding Monetary Policy and Repo Rate
Monetary policy of a country is a central bank’s action that helps to maintain the overall economic growth and money supply. It is the management of interest rates and money supply in the country. It also focuses on achieving macroeconomic objectives set by the RBI monetary policy committee (RBI MPC). The objectives are controlling inflation and maintaining liquidity in the market. Furthermore, it aims at increasing economic growth and consumption.
These objectives can be achieved by steps taken to modify the interest rates and by changing the reserve limit, banks are required to maintain. The central bank can also buy or sell government securities/bonds to control the supply of money.
Repurchase agreement or Repo is a short-term borrowing which is an interest-bearing loan. The government or the central bank repurchase government securities from the private banks. This is done on a discounted rate fixed by the RBI which is called a repo rate.
Reasons for the educated guess of rate cuts
One of the many reasons to further cut the repo rate is the GDP data released on 31st May 2019, which showed a decelerating GDP in Q4 FY19 to 5.8%. The economic growth as well was declined from the estimated 7% to 6.8% in FY19.
Inflation rate at 2.9% for April 2019 was a benign outlook. The mandate inflation bracket is within 2-6% which April month fulfilled. This is also a reason for rate cuts.
Global trends also affect the monetary policy of a country majorly. The declining trends in the US interest rates coupled with inflation well below 4% will also affect the decision of MPC.
The liquidity crunch prevailing since the last few months has stabled after the elections. This may be another reason to look at a rate cut.
RBI is expected to cut the repo rate even further to 5.75% in the August 2019 monetary policy if the monsoon conditions are better.
Previous monetary policy review results
In the bi-monthly monetary policy reviewed in December 2018, the MPC kept the repo rate constant at 6.5%. The inflation forecast revised to 2.7-3.2% from 4-4.5% for H2 FY19. The GDP growth forecast for FY19 remained unchanged at 7.4%.
In February 2019 review, the repo rate was cut down by 25 bps to 6.25%. The benign inflation and growing economy prompted the cut. The GDP growth forecast retained at 7.4%.
In the last monetary policy review in April 2019, the MPC again decreased the repo rate by 25 bps at 6%. This was because the inflation was within the bracket targeted of 4%. As a result of the weakening domestic investment, the GDP projections were revised to 7.2%.
BSE Sensex and NSE Nifty opened on a cautious note on 4th June 2019, because of the ongoing review of monetary policy. Sensex after sealing a lifetime high in the previous session market closed 15.27 points lower at Rs. 40,232.35. The broader index, Nifty 50 slipped 10.10 points to Rs. 12,017.90.
The top losers to the Sensex fall were Tata Consultancy Services (TCS), HCL Tech, Hero MotoCorp, Asian Paints among others. They shed up to 2%. On the other hand, the top gainers from the Sensex pack were – Yes Bank, Power Grid, Tata Motors, L&T, and ITC rising up to 2.6%.
RBI MPC will commence the review meeting on June 3, 2019. The meeting will be for three days – 3rd June, 4th June and 6th June 2019. The resolution of the MPC will be uploaded on the website at 11.45 am on 6th June 2019. The MPC has 6 committee members, the coordinator being the Governor of RBI – Chairperson, Mr Shaktikanta Das. The other five members are Deputy Governor of the RBI, in charge of Monetary Policy – Member, Mr Viral Acharya; the Central Board – Member will nominate one officer of the RBI, Dr Michael Debabrata Patra; Shri Chetan Ghate, Professor, Indian Statistical Institute (ISI) – Member; Professor Pami Dua, Director, Delhi School of Economics – Member; and Dr. Ravindra H. Dholakia, Professor, Indian Institute of Management, Ahmedabad – Member. The resolution is awaited.