RBI to hold rates in August, expected to cut again later this year: Reuters poll

BENGALURU: The Reserve Bank of India will hold its key repo rate at 5.50% next month following a surprisingly bigger-than-expected cut in June, but will lower it again by year-end, according to the latest Reuters poll of economists.

Subdued inflation has allowed policymakers room to cut rates but with the economy expanding at a rapid 7.4% rate in the first three months of this year, the central bank can afford to wait before delivering what is expected to be the last cut in a historically short and shallow cycle.

The central bank shifted to a neutral stance in June suggesting further rate cuts would depend on incoming data about Asia’s third-largest economy.

A highly-anticipated trade deal with the United States, India’s largest trading partner, is still being negotiated months after India was hit with a 26% tariff in early April, with a deadline Washington first set for July 9 then August 1.

Around 75% of economists polled, 44 of 57, expect the RBI to keep the repo rate at 5.50% at its August 6 policy meeting.

The rest in a July 18-24 Reuters poll predicted a 25-basis point cut.

The majority view for a hold is down slightly from 96% in a snap Reuters poll taken in June after the 50-basis point cut.

A majority of economists expect the RBI to cut rates by 25 basis points by year-end, also a shift from June when most expected rates to be unchanged until at least the end of the fiscal year.

“It’s prudent for the MPC to wait and watch on this policy meeting… by August-end we’ll get the growth numbers which will give us greater clarity on whether growth is actually slowing,” said Kanika Pasricha, chief economic advisor at Union Bank of India.

“It’s important to preserve the limited policy rate ammunition amid heightened global uncertainty… as the impact and transmission of the measures taken so far continue to flow through into the economy - and that’s still a work in progress.”

Almost half of those polled in both this and the June poll, 15 of 32, lowered their interest rate forecasts for year-end, while the rest left their projections unchanged.

RBI Governor Sanjay Malhotra said last week policymakers would base future rate decisions on the inflation outlook rather than just current readings.

Inflation is forecast to average 3.4% this fiscal year, lower than the central bank’s current expectation of 3.7%.

Growth was expected to average 6.4% this fiscal year and 6.7% in the next.