RBI needs to go for larger rate cut in June monetary policy: SBI report

The Reserve Bank needs to go for a larger rate cut, of more than 25 basis points, in its June monetary policy review to reverse the current economic slowdown, said an SBI research report.

The RBI had cut the key short-term lending rate (repo) by 25 basis points each in its last two policy reviews. The central bank is slated to announce its next bi-monthly policy decision on June 6.

"Are we currently facing a quasi growth slowdown? The apparent nervousness is clearly reflected in the trends exhibited in key stock indices," said the SBI's research report 'Ecowrap'.

As per a report published by ICICI Bank, there is room for the MPC to cut rates (underscored by the growing slack indicated in the diffusion index output gap), in the August policy.

 

"However, the action would be highly dependent on realised outcomes of monsoons (current forecasts indicate a near-normal monsoons) impacting food prices and trajectory of oil prices. We also think that we are moving towards the last leg of accommodation with both domestic and global growth poised for slight recovery towards the end of the calendar year and our own CPI headline inflation projections averaging 50-60 bps higher than MPC's," it said.

ICICI Bank's Research Diffusion Index indicates a slowdown in industrial activity in Q4 FY2019; while services activity is showing mixed results.

Moreover, global indicators of languishing global trade and rising commodity prices are unfavourable, along with sluggishness in rural activity, it said.

"Based on these indicators we expect GDP growth in Q4 FY2019 at ~6.2-6.3 per cent and improve slightly to 6.5 per cent in Q1 FY2020," it said.

SBI Report said that the initial trends in fourth quarter of 2018-19 exhibit overall decline in sectors such as telecom equipment and infra services; agro chemicals; petrochemicals; infrastructure developers and castings.

Also, pharmaceutical companies dependent on exports are likely to report poor growth numbers. In January-March 2018-19 quarter, of 384 companies more than 330 companies exhibited negative growth in mid-line and bottomline.

Perhaps, significantly depressed rural prices is disturbing rural income and weak demand is affecting the FMCG sector, the report said.

Overall, the report said: "We still believe the current slowdown could still be transitory, if proper policies are adopted in interregnum. For example, the high real interest rates are severely acting as a impediment to investment."

To this end, "We are thus penciling a larger rate cut (in excess of 25 bps) by RBI in the forthcoming policy".

However, such larger rate cuts will still not help fully but transmission will, said the Ecowrap.

The RBI should now ensure that asset and liability side of banks move in tandem and ensure repo rate is directly benchmarked to non-volatile bank liabilities /Current Account Savings Account (CASA) that are mostly used for transaction purposes. Otherwise, we would continue to be constrained by lack of transmission, it added.