Will RBI go for rate cut amid rising inflation risk? Here’s what economists say

At a time when India is going through a period of sharp economic contraction due to the coronavirus situation, economists predict the Reserve Bank of India (RBI) to cut key rates despite rising inflationary pressure.

The decision on rate cuts will be taken at its policy review meeting on Thursday, reported news agency Reuters.

A majority of the economists who took part in a Reuters poll expect the central bank to cut the repo rate by another 25 basis points (bps) on August 6 to a record low of 3.50 per cent. The economists also expect the RBI to go for another rate cut in the next quarter.

Also Read | Eight core industries’ output contracts 15{b1ee4ac4d8d7b8e1af61a560a11ca52574b8103b547ccac8037ce0cdf9e7ba58} in June

Rahul Bajoria, an economist at Barclays, expects a 25 bps cut after the upcoming policy review meeting. He said inflationary worries may not be RBI’s biggest concern at the moment and expects the central bank to continue easing key rates.

“High inflation has added confusion to the Reserve Bank’s policy outlook, but given the state of aggregate demand, we forecast the RBI will continue easing,” said Bajoria.

It is worth mentioning that annual retail inflation rose in June to 6.09 per cent from 5.84 per cent in March. In both months, the inflation rate was above RBI’s medium-term range of 2-6 per cent.

The central bank has been focusing on policies to increase financial stability and support financial growth despite rising inflation.

RBI’s focus on boosting demand and growth comes at a time when the country is going through a period of massive economic slowdown due to the coronavirus situation. India has so far reported over 18 lakh coronavirus cases. Daily cases are also rising much faster than before in the world’s third worst-affected country.

The Reuters poll also showed that most analysts expect the Indian economy to contract 20 per cent in the June quarter in comparison to the April forecast of 5.2 per cent. They also predicted growth to be in negative territory until the December quarter.

As far as the entire year is concerned, the economy is likely to shrink 5.1 per cent and it will be the weakest annual growth performance for the country since 1979.

Besides rate cuts, economists also expect liquidity and regulatory measures from the central bank, which is actively working on addressing demand shocks and financial market dislocations.

“RBI may look to widen the policy corridor to 75 bps by easing reverse repo by a higher quantum,” she said, adding that though they expect a 25-bp rate cut, it may not be effective in the current environment,” Upasna Bharadwaj, an economist at Kotak Mahindra Bank, told the news agency.

It may be noted that the RBI has already reduced the repo rate by 115 basis points since February on top of the 135 basis points slash last year.

Also Read | Fuel demand loses steam in July after 2 months of gains