BUZZ-COMMENT-RBI walks tight rope on rates; 25bps cut likely

Credit: REUTERS/FRANCIS MASCARENHAS

The Reserve Bank of India's rate-setting committee faces a quandary at Thursday's meeting: should it cut rates further to support India's rapidly deteriorating growth outlook or pause in the face of above-target inflation?

July 6 (Reuters) - The Reserve Bank of India's rate-setting committee faces a quandary at Thursday's meeting: should it cut rates further to support India's rapidly deteriorating growth outlook or pause in the face of above-target inflation?

Around two-thirds of economists in a Reuters poll expect the RBI to cut the repo rate by another 25 basis points to a record low of 3.75% , spurred by forecasts of a 20% contraction in the economy in the June quarter and a 5.1% drop for the year through March 2021 .

RBI Governor Das's recent speech emphasizing the importance of reviving growth and preserving financial system stability also points to a cut , especially with Indian banks' bad debt ratio forecast to hit nearly 15% by March in a worst-case scenario .

Arguing against a cut is the spike in June CPI to 6.09%, which is above the RBI's 2%-6% target range . Tepid loan growth due to banks' reluctance to lend, despite a cumulative 250bps of rate cuts since 2019, is another reason to pause.

Traders will also be watching for guidance on future policy, revised inflation forecasts, a moratorium on loan repayments that is set to expire on Aug 31, and liquidity-enhancing measures.

USD/INR is in any case unlikely to break out of its 74.50-75.50 range due to the central bank's efforts to curb volatility.

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INR: https://tmsnrt.rs/2Xsphrm

Reuters Poll: India economic recovery outlook: https://tmsnrt.rs/2COoyJY

(Krishna Kumar is a Reuters market analyst. The views expressed are his own)

((krishna.k@thomsonreuters.com))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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