Will RBI Cut Rates After the Centre's Big Stimulus?

While domestic inflation and growth trends offer headroom for rate cuts, fiscal expansion is a dampener.

- RADHIKA MERWIN

After the Centre’s big-bang stimulus in the form of sharp cut in corporate tax rate, all eyes are on the RBI’s future rate action. After the massive fiscal expansion, will the RBI continue with its monetary easing?

Or will the central bank exercise caution and rein in rate cuts in the light of such a significant slip in fiscal deficit?

A day before the Finance Minister announced the mega corporate tax cut, RBI Governor, Shaktikanta Das, had indicated that there was limited space for fiscal measures. But with the RBI Governor hailing the Centre’s corporate tax cut as a ‘bold measure’, it is now unclear if the RBI would view the fiscal expansion as a deterrent to further rate cuts.

On the data front, growth slowdown in the domestic market and a favourable inflation trend, point to the possibility of further rate cuts. Weakening global growth and wave of monetary easing across central banks also support further monetary easing by the RBI (though there is less ammunition left with global central banks to address the growth slowdown). On the flip side, expansionary fiscal and monetary policy throw open risks to macroeconomic stability, which need a close watch.

Given all of this, the repo rate can move from 5.4 percent at present to 5-5.25 percent by the end of the fiscal, implying token one to two rate cuts at best. Since 2000, repo rate has fallen to a lowest of 4.75 percent in April 2009.