RBI governor Shaktikanta Das may hope a sixth rate cut this year will do the trick⁠— but this one will be toughest so far

  • RBI is expected to cut its interest rates yet again today after five successive cuts this year.

  • This time however food inflation might not give RBI the fiscal freedom for a deeper rate cut.

  • GDP for the second quarter slowed to a six year low, and October core sector index fell by 5.5% in October.
  • A major fiscal stimulus is hindered by the lack of available household financial savings, say economists.

The Reserve Bank of India has its task cut out this policy. The central bank has cut interest rates at every policy review this year, might have to do it again. Only, this time it should be deeper and more impactful, especially since the country’s GDP has slowed down to a six year low – to 4.5% for the second quarter.

The country’s interest rates, after five successive cuts, is at its lowest in ten years. But it was not enough. Not after, core sector performance fell by 5.8% in October.

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“Despite the policy initiatives taken by the government during the past few months and RBI’s continued accommodative stance, the GDP grew at a much lower rate in the second quarter, the lowest in last 26 quarters. This has confirmed the fears of continuing slowing down of Indian economy. Much of the Q2 growth in GDP came in through rising Government Final Consumption Expenditure (GFCE),” said Dr M Govinda Rao, chief economic advisor at Brickwork Ratings.

Yet, a deep cut might not be a given either. The governor Shaktikanta Das had the benefit of low inflation for the last few credit policies. But in the last two months, food inflation –especially with regards to vegetables has been high. It means Das has to do a much more sensitive balancing act.

He also has to match the sky high expectations of investors and industry who have their hopes set on another cut. “The recovery is unlikely to be V-shaped as consumer demand, credit supply and risk appetite remains lacklustre.

This and the falling core-CPI should allow the RBI focus more on growth, while a major fiscal stimulus is hindered by the lack of available household financial savings,” said Sreejith Balasubramanian, economist - fund management at IDFC AMC.