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RBI likely to temper rate cuts

Date: 23-09-2019
Subject: RBI likely to temper rate cuts
Mumbai: The RBI may cut the benchmark rate by up to a quarter percentage point in October against an anticipated 25-40 basis points after FM Nirmala Sitharaman announced a host of fiscal measures on Friday, showed an ET survey of market participants.

“This fiscal stimulus would help reduce the pressure on monetary policy to do the heavy-lifting to counter the slowdown through lower interest rates,” said Gaurav Kapur, chief economist at IndusInd BankNSE 6.20 %. “The government’s intent behind this tax reform is to revive investment activity, especially in the private sector.”

The cuts in corporate tax rates amount to about 0.7 per cent of GDP. While this will have implications of Rs 1.45 lakh crore on government finances, the move would encourage corporates to launch expansion plans.

The majority of the 25 market players surveyed by ET said the need for aggressive rate cuts by the RBI — like in the August meeting, when it slashed repo rate by 35 bps — has receded after the government’s move.

India’s GDP growth slowed for the fifth straight quarter to 5 per cent during April-June — its slowest pace of expansion in 25 quarters. Credit has dried up as risk-averse lenders stay away from fresh lending.

“In a slowdown environment, expansionary fiscal policy is more effective in simulating growth than monetary policy action,” said Badrish Kulhalli, head (fixed income), HDFC Life.
Plans for new investments will prompt companies to borrow more without waiting for cheaper money. At the same time, the benefits of lower corporate taxes are likely to percolate to consumers, though with a lag. All these events would help India Inc gain more business.

“With expanding fiscal measures, business volumes are likely to grow, trimming possibilities of deep rate cuts,” said A Balasubramanian, MD, Aditya Birla Sun Life AMC. “Strategic government disinvestment should help keep fiscal deficit in check.”

There is a fear of the government breaching the fiscal deficit target of 3.3 per cent of GDP for FY20 in view of the tax cuts. Dealers expect fiscal deficit to be in the range of 3.70-4 per cent this fiscal year. Owing to these fears, the benchmark bond yield surged 24 basis points during Friday’s trading, pulling prices down. However, some market players said RBI’s dividend transfer and the government’s divestment plan could help bridge the fiscal deficit gap. The central bank’s moderate pace o ..

Last week, RBI governor Shaktikanta Das had hinted at more rate cuts, citing the sluggish economy. The central bank has cut the repo — or the rate at which the RBI lends short-term money to commercial banks — by 110 basis points in the past four consecutive polices.

Source: economictimes.indiatimes.com

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