RBI Rate Cut: SBI Advocates for 25 Bps Easing While Experts Favor Maintaining Current Rates
A recent report from the State Bank of India (SBI) has recommended a 25 basis points cut in the repo rate, suggesting it as the optimal choice for the Reserve Bank of India (RBI). This recommendation comes ahead of the RBI’s Monetary Policy Committee (MPC) meeting, which is set to begin on Monday. While the SBI report emphasizes the potential benefits of a rate cut, many experts anticipate that the MPC may opt to maintain the current rates during its upcoming review, particularly in light of ongoing geopolitical tensions and recent tariff increases imposed by the United States on Indian goods.
Current Economic Context
The MPC, led by Sanjay Malhotra, will convene for three days to discuss the monetary policy against a backdrop of significant global economic challenges. The recent decision by the US to impose a 50% tariff on Indian shipments adds to the complexity of the situation. The RBI has already implemented a cumulative 100 basis points reduction in the repo rate since February, primarily in response to easing consumer price index (CPI) inflation. However, the committee chose to keep rates unchanged during its last meeting in August, adopting a cautious approach to assess the impact of global developments on domestic economic growth.
The SBI report argues that a further reduction in the repo rate is justified, as retail inflation is expected to remain manageable in the coming financial year. This perspective aligns with the views of several economists who believe that the current economic conditions do not pose an immediate threat to growth, despite the external pressures from tariffs and geopolitical tensions.
Expert Opinions on Rate Decisions
Economists have varying opinions on the likelihood of a rate cut in the upcoming MPC meeting. Madan Sabnavis, Chief Economist at Bank of Baroda, expressed skepticism about any changes to the repo rate, citing limited scope for adjustments. He noted that inflation remains below the RBI’s target of 4%, and growth is projected to stabilize above 6.5% for the year. Sabnavis suggested that maintaining the current rate could help manage market sentiment and bond yields.
Aditi Nayar, Chief Economist at ICRA, highlighted the potential impact of recent GST rationalization on inflation. She indicated that this policy change could lower headline CPI by 25-50 basis points in the upcoming quarters, suggesting a status quo for the repo rate in the October policy review. The GST has been streamlined into a two-tier structure, which has resulted in reduced prices for a majority of daily-use items.
Future Projections and Considerations
Dharmakirti Joshi, Chief Economist at Crisil Limited, anticipates that the RBI may consider a repo rate cut as soon as October, driven by lower-than-expected inflation rates. He pointed out that core inflation remains low, despite rising gold prices, and that the recent rate cut by the US Federal Reserve provides the RBI with additional flexibility. Joshi believes that the ongoing GST rationalization will contribute to disinflationary trends in the economy.
Conversely, Mandar Pitale, Head of Financial Markets at SBM Bank (India) Ltd, expects the MPC to maintain a status quo in its upcoming meeting. He emphasized the need for the committee to assess the effects of recent changes in the cash reserve ratio (CRR) and any forthcoming fiscal measures from the government. Pitale suggested that the baseline view remains one of a prolonged pause, with a slight chance of a rate cut in December, depending on future growth and inflation dynamics.
Impact of Previous Rate Cuts
A recent study published in the RBI’s Bulletin indicates that the pass-through effect of the cumulative 100 basis points repo rate cut since February has been significant, positively influencing lending and deposit rates. This robust transmission suggests that previous rate adjustments have effectively impacted the financial landscape, providing a foundation for future monetary policy decisions. As the MPC prepares for its upcoming meeting, the interplay of domestic economic conditions and global developments will be crucial in shaping the future of India’s monetary policy.
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