The Reserve Bank of India (RBI) will need to make a larger rate cut than 25 basis points during its June monetary policy review if it is to help reverse the current economic slowdown, says SBI Research’s report published on Tuesday. India’s central bank has already cut the key short-term lending rate (or repo rate) by 25 basis points (0.25 per cent) each during the last two monetary policy meets in February and April. The next meeting of the RBI’s Monetary Policy Committee (MPC) is slated for June 6. According to SBI Research analysts, an “apparent nervousness is clearly reflected in the trends exhibited in key stock indices”.
The report points out that initial trends for the fourth quarter of financial year 2018-19 (Q4FY19) have exhibited an overall decline in sectors such as telecom equipment and infra services, agro chemicals, petrochemicals, infrastructure developers, etc. Of around 384 companies analysed, 330 have exhibited negative growth in mid-line and bottomline for Q4FY19, it adds. SBI Research also says depressed rural prices may be disturbing rural income, with weak demand affecting FMCG.
However, thefeared slowdown may be transitory if high real interest rates are addressed. “We believe the current slowdown could still be transitory, if proper policies are adopted in interregnum. For example, the high real interest rates are severely acting as a impediment to investment,” the report’s authors said, adding that they are ”thus penciling a larger rate cut (in excess of 25 bps) by RBI in the forthcoming policy”.