As the RBI readies itself to announce its monetary policy on Wednesday, there is an expectation that the interest rates will be cut by a sizeable 25 basis points. Furthermore, experts and analysts believe there will be more cuts and a whole 100 bps may be the final reduction for the calendar year 2019.
The countryâ€™s economy has been sluggish, with most sectors registering negative growth in the past few months. Only the monsoon may offer some solace since the prediction for shortfall of monsoon is within manageable limits this year. This can be helpful in keeping inflation under control and below the threshold limit of 4% that RBI has targeted for the mid-term.
It is the monetary policy committee that determines the interest rate and there have been sufficient indications from the MPC (monetary policy committee) meeting last June that the markets must be prepared for a rate cut. The committee too had relied on the Met Departmentâ€™s report on monsoon and the inflation flash points before giving out such hints. By current estimates, there will be a further 50bps cut in October and December.
The aspect to be closely watched is how much of this results in credit off-take since the RBI has already ensured that there is enough liquidity in the system. A figure of Rs 1.5 to Rs 2 trillion is being quoted as surplus liquidity. There are therefore no hurdles to availing credit provided the markets and consumer sentiment remain positive.
It is significant that these subsequent 25bps drops on three occasions have been announced after the present Governor Shakthikanta Das took over. The Governor too joined the other members of the monetary policy committee in giving indications of the impending reduction in interest rates after the meeting of the committee in June.
After this announcement of a quarter percentage cut in the interest rate, on Wednesday, the central bank may want to keep a watch on how it works at the marketplace before making any further policy move. There is a window for the borrowers to make up their minds and approach the lenders for funds.