Reserve Bank of India likely to cut interest rates despite inflationary pressures
India’s worsening economic outlook as coronavirus cases soar has raised the chance the central bank will cut interest rates at its policy review on Thursday, in spite of inflationary pressures.
Around two-thirds of economists expect the Reserve Bank of India (RBI) to cut the repo rate INRREPO=ECI by another 25 basis points (bps) on August 6 and once more next quarter to a record low of 3.50%.
“High inflation has added confusion to the Reserve Bank’s policy outlook, but given the state of aggregate demand, we forecast the RBI will continue easing,” said Rahul Bajoria, an economist at Barclays who expects a 25-bp cut.
Annual retail inflation INCPIY=ECI rose in June to 6.09% from 5.84% in March, remaining above the RBI’s medium-term target range of 2%-6%.
The RBI’s recent policies have focused on financial stability and the need to support growth despite the price target.
The country was placed under one of the strictest lockdowns in the world in late March for over two months to halt the spread of the coronavirus. The government gradually eased restrictions in June although infections continue to rise.
The poll showed most analysts expect the economy to contract 20% in the June quarter versus the April forecast of a 5.2% fall and remain in negative terrain until the December quarter.
For the full year 2020/21, the economy is likely to shrink 5.1%, which would be its weakest performance since 1979, a sharp contrast to the 1.5% expansion forecast in April.
Apart from rate cuts, Upasna Bharadwaj, an economist at Kotak Mahindra Bank, expects liquidity and regulatory measures from the RBI to address demand shocks and financial market dislocations.
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