Is time ripe for RBI to go for further Repo cut in next MPC meet?

The house is divided between two groups of economists. While one group is strongly in favour of further rate cut by RBI, post three-day bi-monthly monetary policy meeting, which begins from September 29. On the other, there is another school of thought, which has voted for status quo on rate cut this time.

The benchmark yields have somewhat hardened globally and India is no exception since the June’s monetary policy. The spread vis à-vis policy rates vaulting in recent days, specifically SDL rates. Moreover, post June rate cut, GST rationalization has been creating multiplier effects and benign inflation trajectory.

Post June, as per Ecowrap, the bar for rate cut is indeed higher. But there is no point in committing a Type-2 error again by not cutting rates as inflation will continue to remain benign even in FY27 and without a GST cut, it is tracking below two per cent in September and October. With GST rationalization, October CPI could be closer to 1.1 per cent, the lowest since 2004.

Debt markets are also facing challenges from changing preferences of institutional allocators towards riskier assets, their appetite whetted by increased demand from younger investors baying for higher returns. Insurance firms to pension funds have upped the ante, buoyed by sweeping regulatory landscape, a direct corollary seen in reduced preferences for select papers that earlier found favour with such long-term investors.

The Central government dated securities outstanding was 54 lakh crore as on March 2018 which rose to Rs116.4 lakh crore by March this year, largely unchanged today. The holding pattern shows a gradual fall in the share of commercial banks, while insurance companies stepped up their purchase. Pension funds, non-existent in 2018, became fifth largest holder of central government dated securities while provident funds too have scaled up overall holding.

There is a need to recalibrate stance to mitigate market confusion regarding future path for monetary policy. A rate cut at the moment is the best possible option for RBI, which also projects it as forward-looking central bank.

However, as per Icra, the MPC is anticipated to maintain the status quo on the Repo rate in its current review. This view is supported by the positive impact of GST reforms on demand, stronger-than-expected Q1/GDP growth, and an inflation trajectory that, while lowered due to GST rationalization, is expected to slope upwards thereafter.

While October-November may mark a fresh low for the CPI inflation, the trajectory subsequently remains upward sloping.

GST rationalisation is unambiguously set to moderate inflation. However, this is the outcome of a policy change and will likely be accompanied by stronger demand. This suggests a status quo for the Repo rate in the October policy review, in what appears to be a close call.

Therefore, it will be interesting to see to what is the outcome of the MPC review meeting which concludes on October 1.