Further rate cut in October by RBI likely

New Delhi, Sep 13: The Reserve Bank of India is expected to go for a further rate cut in the next month's monetary policy review as inflation is expected to pan out in line with the central bank's projection, experts say.

According to global as well as domestic brokerages, moderating inflation and a negative output gap are likely to open the door for an accommodative monetary policy.

According to official data, retail inflation inched up marginally to 3.21 per cent in August from 3.15 per cent in July, mainly due to costlier food items.

India's industrial production growth slowed to 4.3 per cent in July, dragged mainly by manufacturing sector's poor show.

"Contained inflation and a larger negative output gap set the stage for policy easing in October. We expect 40 basis points (cut) cumulatively in Q4," Japanese financial services major Nomura said in a research note.

It further said the RBI's FY'20 GDP growth projection of 6.9 per cent "appears too optimistic" and is widely expected to be downgraded at the October 4 policy meeting.
According to Bank of America Merrill Lynch, the RBI rate cuts are necessary to bring real lending rates down to incentivise investment.

"We believe there is a rising case for a 50 basis points RBI rate cut, on October 4, with August inflation coming in at a lower-than-expected 3.2 per cent," BofAML said in a research note.

Domestic brokerage Kotak Securities in a report said CPI inflation is likely to remain benign in the near term given the weak growth impulses.

"We expect the MPC to cut the repo rate by up to 75 basis points through the rest of FY2020 —including a cut of around 40 basis points in the October policy — with focus remaining on transmission," it noted.

The RBI, which mainly factors in CPI for arriving at its bi-monthly monetary policy, has been mandated by the government to ensure inflation remains at 4 per cent, with deviation of 2 per cent on either side.

The central bank, which has already reduced the key policy rate four times in the current calendar year, is scheduled to announce its next bi-monthly monetary policy on October 4.