Monetary Policy Committee Assembly Initiated, Anticipation Surrounds Potential Third Interest Rate Reduction as Inflation Remains Moderate
In a Nutshell:
The Reserve Bank of India (RBI) is holding its Monetary Policy Committee (MPC) meeting on June 6, 2023, and economists and experts predict a third 25 bps repo rate cut to 5.75%, bringing the total reduction in the previous two policy reviews to 50 bps. The decision will be influenced by factors like economic growth, inflation, and the RBI's monetary policy objectives.
The Lowdown:
Getting straight to the point, the RBI's MPC is meeting to discuss potential rate cuts, and experts think a third cut of 25 bps could occur, lowering the repo rate to 5.75%. With the current rate standing at 6%, a reduction would help make borrowing cheaper and stimulate economic growth.
The decision will hinge on several macroeconomic indicators, primarily inflation and signs of cyclical slowdown. The RBI looks at inflation closely to keep it within target ranges, and with headline CPI inflation consistently below the target of 4%, there's enough room for rate cuts. Additionally, the GDP growth appears to soften due to external shocks, such as trade disruptions from recent US policy moves.
Major rating agencies have downgraded India's GDP growth projections for FY26, although the RBI maintained its 6.5% estimate in April. Some institutions have revised expectations to a 6.0%-6.3% range. Despite this, the RBI's accommodative stance indicates their intent to inject liquidity and support growth, reinforced by April's CPI inflation easing to 3.2%.
While the final decision will depend on evolving global conditions, particularly from advanced economies, market consensus is building around the likelihood of a third rate cut to help sustain India's growth path. A new report by SBI even projects a mega 50-basis point rate cut in June's RBI MPC policy. As liquidity remains in a surplus mode, liabilities are repriced faster in the current rate-easing cycle.
Further Insights:
The central bank's monetary policy committee (MPC) evaluates various economic indicators to decide on rate adjustments to ensure economic growth and maintain inflation control. The RBI aims to stimulate economic growth by reducing borrowing costs, which can lead to increased spending and investment. By keeping inflation within target ranges, the RBI ensures price stability for consumers while providing room for rate cuts.
[1] Cash Reserve Ratio (CRR): A ratio that determines the proportion of deposits that banks must hold in reserve with the RBI, limiting the amount available for lending.[2] Repo Rate: The interest rate at which banks borrow short-term funds from the RBI. Reducing the repo rate makes it cheaper for banks to borrow, which can lower their lending costs and increase spending in the economy.
- In the context of the upcoming Monetary Policy Committee meeting, a potential decrease in the repo rate, currently at 6%, could signal an effort to make borrowing cheaper for businesses and stimulate growth in the finance sector.
- The Reserve Bank of India's aim in reducing the repo rate is twofold: to stimulate economic growth by lowering borrowing costs for businesses, potentially increasing spending and investment, and to keep inflation within target ranges, ensuring price stability for consumers while offering room for future rate cuts.
