RBI's Monetary Policy Meet today; market expects 25-basis point cut in key rates

The six-member monetary policy committee (MPC), headed by RBI Governor Shaktikanta Das, will announce the second bi-monthly monetary policy of this fiscal today. The buzz is that the repo rate will be slashed for the third time in a row and a change in policy stance may also be on the cards. Repo rate is the interest rate at which the RBI lends money to banks. When the cost of borrowing goes down for banks, they are able to lower their respective marginal cost of funds based lending rate (MCLR), which directly impacts your loans. The committee's resolution will be put up on the RBI website at 11.45 am after three days of deliberations. Here are the key expectations from the latest monetary policy:

Repo rate

Two-thirds of 66 economists polled by Reuters expect the MPC to cut the repo rate by 25 basis points to 5.75 per cent. Given that this survey was taken before India released much-worse-than-expected economic growth numbers, the expectations for a rate cut have probably hardened. Data released last week showed annual economic growth slowing to 5.8 per cent in the January-March quarter from 6.6 per cent in the previous quarter, the slowest in more than four years. "The market is expecting RBI to cut the rates by at least 25 basis points, and we will not be surprised if they decide to cut the rate by even 50 bps, to infuse liquidity and push growth," Romesh Tiwari, head of research at CapitalAim, told Reuters.

The MPC can also draw comfort from subdued inflation and sliding global crude oil prices. Running at 2.92 per cent annually in April, inflation has stayed below the medium-term target of 4 per cent for the past nine months. Meanwhile, the price of Brent crude oil fell below $60 a barrel on Wednesday for the first time in four months, weighed down by abundant US crude inventories. Hence speculation is rife that a bigger 35 bps or even 50 bps rate cut may be announced. If things go as per expectations, it will be the first time in six years that such back-to-back rate cuts will be announced. The last time the MPC moved this quickly to lower rates was reportedly in 2013 to revive the moribund economy from growth rates that had slipped to a decade low.

RBI likely to cut key rates, turn 'accommodative' after dismal GDP

Policy stance

The RBI had retained its "neutral" stance after the rate cut in April but according to traders a change in this stance to "accommodative" in the policy to be announced today will be more comforting for markets than just a rate cut, especially in light of the slowdown. "Liquidity woes in the banking system are far from over," said Lakshmi Iyer, Chief Investment Officer (Debt) at Kotak Mahindra Asset Management Company, adding, "What is more important for markets is the MPC guidance than the actual rate action."

Despite the 50 bps rate cut over the past two monetary policies, the banks hardly passed on the benefit - State Bank of India, the country's largest lender by assets, cut its key lending rate by only 10 basis points in response. In fact, banks actually hiked up the rates on some tenors. Analysts say that policymakers should also find ways to boost banks' liquidity to ensure they drop their lending rates too.

Saurabh Bhatia, Fund Manager, DSP Investment Managers told ET Now that a shift in the stance from neutral to accommodative will allow the much needed monetary transmission because repo and market yields have different trigger points. "Repo is largely moving on inflation and growth outlook, market yields are largely moving on-demand supply. For repo rate moves to correspond to market yields what you need is a little bit more visibility on the liquidity and this liquidity to be on a surplus side," he said.

The trouble is that banks are laden with bad debt and are scared of losing customers if they cut deposit rates, constraining their ability to cut lending rates despite all the prods from the RBI. Furthermore, a series of defaults at lender Infrastructure Leasing and Financial Service Ltd last year has raised concerns about the country's shadow banking industry with other lenders also facing trouble accessing capital and rating downgrades.

Fiscal uncertainty

The big task for the Modi 2.0 government is to stop the rot, and his economic strategists are working on big-bang reforms. The new Finance Minister Nirmala Sitharaman is due to present a budget on July 5 that many analysts expect to be expansionary, though she cannot afford to let the deficit slip too much. Until then the RBI will have to live with the uncertainty over the government's fiscal plans while knowing that when it does boost spending it will go some way to boosting banks' liquidity.

Stock market

Benchmark indices Sensex and Nifty started on a positive note on Thursday ahead of RBI's monetary policy outcome to be announced today. After the initial uptick, indices moved into the red. On Monday, the Sensex hit a fresh peak of 40,308 while Nifty hit 12,103 on expectations of a rate cut. The buzz is that the policy statement to be released shortly can also be a big booster for the stock markets.

Sushmita Choudhury Agarwal with Reuters inputs