RBI will have to do more than cut repo rate like address PMC and other crises

• The market is expecting RBI to cut its interest rates yet again by 25 basis points.
• The RBI is expected to continue its accommodative stance.
• RBI could also revise GDP growth projections to the lower end, for the fiscal.

India’s central bank might continue with its efforts to stimulate the slowing economy, just like the finance ministry. The market is expecting the RBI to cut interest rates yet again, after last monetary policy’s unexpected 35 basis point cut.

“Based on the benign inflationary trends and lingering growth concerns, we expect RBI to cut the policy repo rate by 25 bps in the October MPC meet. The RBI will continue to maintain its stance at accommodative as the risks to inflation are limited,” said a report by CARE ratings.

This is widely expected as the factors that influenced last 4 rate cuts have remained the same—inflation has remained low which means an increase in interest rates will not make food and essential items costlier for public.

For the year, consumer price index or CPI inflation would be at 4%.

The RBI also has to address the slowing economic rate. Moreover, the first quarter earnings of most companies have been tepid, not to mention the mounting problems of slowing auto sales, resulting in halted production and job cuts.

“Given the significantly lower GDP growth for Q1 of 2019, RBI could revise the GDP growth lower for the fiscal. CARE Ratings expects GDP growth to be in the range of 6.4-6.5% for the fiscal,” the report said.

Banking sector crisis

Yet, growth is not the only worry RBI has. The ongoing crisis at PMC bank which disallowed depositors to withdraw money has caused widespread fears on the stability of the banking sector. Not only are most depositors worried, there are rumours that multiple banks will fall into a similar crisis mode.

However, the RBI and Finance Ministry both have been making statements that the system is stable, constantly assuring panicked customers. At this monetary policy, the RBI governor Shaktikanta Das will have to do more than allay fears, he will have to address the concerns of crores of depositors who are worried that their money is in the wrong hands.