RBI May Further Cut Rates On October 4

By slashing the corporate tax and taking several measures, the government has done its bit. Now it’s time for the Central Bank to take measures to further revive the sagging economy. With the Reserve Bank of India’s (RBI) monetary policy committee meeting underway, the real question is what steps the Central Bank would take on October 4. 

Let's dive a little deeper and find out the expectations.

Despite progressive reduction by RBI in repo rate amounting to a cumulative 110 basis points (bps) over last 6 quarters, many experts and economists are of the view that the Central Bank would go for another rate cut of 25 bps.

Experts are optimistic that low inflation provides enough headroom for the RBI to further lower its policy rate, as the festive season sets in when people make huge purchases.

Shishir Baijal, Chairman & Managing Director, Knight Frank India feels, “The foremost amongst these suggestions remain a substantial and a single 50 basis point rate cut that can reinvigorate consumer sentiment towards consumption and push private investment. Besides, some strong and well-defined initiatives by RBI focusing on liquidity infusion, especially in the real estate sector would also go a long way in stimulating demand and in reviving the stalled supply.”

On September 18, the US Fed - the benchmark rate for short-term funds -  had cut interest rate by 25 bps, bringing the rate down to 1.75-2 per cent.  

The Bank of England’s present rate of interest stands at 0.75 per cent. The question that arises is why is RBI repo rate so high at 5.4 per cent if compared with other benchmarks like the US Fed or Bank of England?

Replying to the question, RBI Governor Shaktikanta Das had earlier clarified that India couldn’t go down to the level (of interest rates) of other advanced economies because of its inflation target of 4 per cent.

India has an inflation target of 4 per cent as against central banks in advanced economies who have an inflation target of around 2 per cent. This offers them the scope to cut interest rates to much lower levels.  

One of the main functions of RBI is to control and target inflation. In June 2016, the RBI was mandated by the government to target a medium-term inflation target of 4 per cent with a band of +/- 2 per cent for a 5-year period up to March 2021. The RBI targets consumer price index (CPI)  or retail inflation.