RBI May Lower Key Interest Rates By 35 Basis Points

RBI May Lower Key Interest Rates By 35 Basis Points

Mumbai: With GDP growth touching a five-year low, the RBI may go for 35 basis points cut in benchmark policy rates at its bi-monthly Monetary Policy Committee's rate review meeting starting from Wednesday. One basis point is equivalent to 0.01 percent or 1/100th of a percent.

The MPC, headed by RBI Governor Shaktikanta Das, had started meeting for three days beginning June 3 to firm up the second bi-monthly monetary policy of the fiscal year. The RBI rate cut hopes pushed the Sensex to a new high above 40,000 points.

"Market has hit a new all-time high on expectations that the Reserve Bank of India, in the forthcoming monetary policy on June 6, might cut rates by 50 basis points," Naveen Kulkarni, head, research at Reliance Securities, said.

The RBI has already cut rates twice, by 25 bps each time, during the year to support growth, and raise demand with inflation at a moderate level. India's economy grew slower to an 18-quarter low in the January-March quarter at 5.8 percent, pulling down the annual growth to a five-year low in FY19 to 6.8 percent.

Taking a cue from this, the central bank is widely expected to cut interest rates further from 6 percent to reinvigorate the flagging economy but sources said this could be as high as 35 basis points, looking at the slackness in the economy.

Bank of America-Merrill Lynch says that the RBI will lower its benchmark interest rate by an unconventional 35 basis points.

"Fading fiscal/rupee risks, after PM (Narendra) Modi's re-election, should allow a cut greater than 25 basis points, in line with Governor Das' out-of-the-box proposal," BofA Merrill Lynch Global Research said in a note.

Dalal Street sources said that it is not just the slowing economy, but Governor Das is also a radical thinker and earlier this year, he, at a global forum, had announced his intention to break away from the tradition of 25 bps cuts and try out other permutations.

Mr. Das's comments in Washington in April that central banks could be more flexible in the size of rate adjustments, rather than sticking to the usual moves of 25 basis points at a time is more applicable today looking at the grim economic situation, said the sources.

Dalal Street also called for a change in policy to "accommodative" from "neutral".

"While growth is likely to recover modestly in FY20, it is still likely to remain below the long-term average. Hence, a slack in growth is likely to strengthen the case for a further rate cut," ICICI Securities said in a June 3 note.

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