Elections done & dusted, next big thing for India is RBI rate cut - What can you expect from Governor Das? Find out

This week has been very busy and cheerful for India. With poll counting in Lok Sabha Elections 2019 revealing a clear win for NDA government, the attention now has shifted towards economic development. Having said that, the next big thing which will set a course for India would be the Reserve Bank of India (RBI) monetary policy. Barely two weeks are left for, RBI Governor Shaktikanta Das to present India's second bi-monthly monetary policy. 

Past two policy stances announced rate cuts and these have worked in favor of citizens, banks, foreign and domestic investors and overall market.

RBI policy repo rate has come down by a massive 0.50% from February 2019 up till date. Now policy repo rate stands at 6%. Experts have pinned faith on one more rate cut in June policy. 

But should RBI follow another rate cut, that's the real question?

Experts at MorningStar say, "Several factors might provide RBI room to go ahead with another rate cut in the June MPC meeting, including consistent fall in food prices, benign food inflation outlook, expectation of normal monsoon, fall in core inflation, lower growth rate projection, widening of output gap with increased headwinds from a slowdown in the global economy."

To an extent, MorningStar reveals that a rate cut expectation is already factored in by market participants as the yield on the 10-year benchmark G-sec is down by 20 bps in the last two weeks. 

"Although, the rate cut would benefit the economy and support NDA’s growth agenda; however, the inefficient transmission of rate cuts has led to a partial and delayed reduction in the lending rate of banks," MorgingStar said.

Meanwhile, Economists at Morgan Stanley say, "We expect the RBI to cut rates by 25-50 bps over the next six months. We also think that the RBI will continue to infuse liquidity and probably take banking sector liquidity to neutral from a deficit. Over the past 12-months the RBI has injected Rs3.2 trillion through open market operations and about Rs700 billion through US$ swaps. Liquidity will also improve as the currency built up during the election season finds its way back into the banks. Taking liquidity to neutral conditions will help assuage the tightness that non-banks are suffering from. The non-banking financial sector, on the aggregate, is likely to experience slower growth as the sector builds liquidity and capital. This will be an opportunity for the large banks. In that context, in our view, it is also important for the government to consider further capital infusion into the public sector banks which are flush with deposits but are capital constrained from lending."

On Friday, Sensex finished at 39,434.72 higher by 623.33 points or 1.61%. Similarly, Nifty also gave some stellar performance, after ending at 11,844.10 higher by 187.05 points or 1.60%. 

Mustafa Nadeem, CEO, Epic Research said, "RBI meet will be done in the First week of June and Markets will now be eyed since there are further hopes of Rate cuts with inflation still hovering near an all-time low and decisive government that focuses on growth. Since the counterpart inflation seems to be in control we believe there can be expectations on the street for a rate cut."