The RBI Monetary Policy Committee will announce its decision on the policy rate on August 6. The central bank this year has cumulatively slashed 115 basis points. With rising inflation and dire domestic economic conditions in view, the Street is expecting a quarter of a percentage point cut in the repo rate this time, from 4 percent to 3.75 percent.

Share Market Live

NSE

On May 22, RBI had announced a further 40 basis point reduction in repo rate to 4 percent, after reducing it by 75 basis points in March. However, the June meeting was advanced to May 20-22 in view of the COVID-19 pandemic.

What happened in the last policy meeting?

In May, all six members voted to cut repo rates, and retain the accommodative stance, indicating future scope for further rate cuts. The minutes of the MPC showed that the MPC chose to accord a higher priority to reviving economic growth and investment, than just targeting inflation.

It had been only two months that the country came under lockdown. With global economy at a standstill, the most-affected were the domestic households and the economic activity at the micro level.

Given the enormity of a collapse in demand, RBI governor Shaktikanta Das in his last policy address speech said the need is to move ahead full throttle to ease financing conditions further so as to revive consumption and revitalise investment.

The governor reiterated that the RBI remains watchful and would not hesitate to use any conventional and unconventional tool in its toolkit to revive the macro economy and preserve financial stability while adhering to the inflation target.

What happened in March RBI-MPC meeting?

The central bank in March policy meeting cut 75 bps repo rate to 4.4 percent from 5.15 percent earlier. This was the meeting when the RBI allowed a 3-month moratorium to all banks, financial institutions on all loans. In the view of the nationwide lockdown, the central bank also reduced the reverse repo rate by 90 bps.

Das in his address said, "Projections of growth and inflation would be heavily contingent on the intensity, spread and duration of COVID-19. The MPC has refrained from giving out specific growth and inflation numbers because the situation is changing and the outlook is uncertain."

"There is a rising probability that a large part of the global economy will slip into recession. Turning to growth in India, the 5 percent growth expectation is at risk," the RBI governor had said in March.

To infuse liquidity in the system, RBI had announced moratorium on term loans, deferment of interest on working capital facilities and easing of working capital financing.

SBI research report: Repo rate in August likely to remain unchanged

The research report-Ecowrap said, "We believe an August rate cut is unlikely. We believe that the MPC could now well debate what further unconventional policy measures could be resorted to in the current circumstances to ensure financial stability is continued to be addressed."

Out of 115 basis points, banks have already transmitted 72 basis points to the customers on fresh loans and some large banks have transmitted as much as 85 basis points, said the report.

This has helped banks to reduce their one-year marginal cost of fund-based lending rate (MCLR) by 55 bps during March to May 2020, it said.

"We expect a jump in financial savings in FY21, also as a result of the precautionary motive," added the report.

Experts believes a rate cut in August policy meet is imminent

Expect RBI to cut the key rate by 25 bps, said Indranil Sen Gupta, India Economist at BofA Securities for the August policy meeting.

“We are of the view that one should look through this number because it is driven by methodological issues as well as supply-side disruptions. We think that the MPC should cut about 25 basis points on August 6 and 50 basis points in October," added Gupta.

Looking at the trail of rate cuts, he said further that the inflation will collapse to 2.5 percent in the second half of the year on base effect.

Mirroring Sen Gupta's view on the policy rate cut, Neeraj Gambhir, president, head treasury and markets at Axis Bank said, "The possibility of a rate cut is still fairly high. I don’t think this is an environment in which inflation is the driving factor as far as the MPC decision making is concerned."

Meanwhile, Lakshmi Iyer of Kotak Mahindra AMC said, "Small move in the yields may not be ruled out, but I think the broader ingredients for a rally as far as the yield curve is concerned, still remain fairly intact."

First Published:Aug 4, 2020 8:41 PM IST