More policy interest rate cuts to come: Fitch Solutions
Dec 08, 2020
Singapore, December 8 : Fitch Solutions has maintained that the Reserve Bank of India (RBI) will lower its policy repurchase (repo) rate by another 50 basis points by the end of FY22 (April 2021 to March 2022) with forecasts specifically looking at 25 basis points at the last FY21 policy meeting in February 2021 and another 25 basis points by end-FY22.
The RBI held its policy repo rate at 4 per cent during its monetary policy meeting on December 4. The reverse repo rate was accordingly held at 3.35 per cent.
"At Fitch Solutions, we expect a 25 basis points cut at the February 2021 meeting and another 25 basis points by end-FY22 after headline consumer price inflation eases to within the RBI's 2 to 6 per cent inflation target range as food supply conditions after October 2020 ease with the summer harvest."
Fitch said that inflation will ease along with improving food supply as the summer harvest feeds through the economy, which will allow the central bank to resume its rate cutting cycle in February 2021 to add tailwinds to India's economic recovery.
Given that economic recovery momentum is likely to slow after the August to November festive season combined with revenue constraints limiting scope for fiscal stimulus to drive further momentum, Fitch said further support from monetary policy will be necessary to lift India out of its current economic weakness.
However, with reports of farmers still protesting against the government's agriculture market reforms, there is the risk of a slower easing of food inflation due to supply chain disruptions.
Moreover, said Fitch, reports of pre-harvest rains in some areas have also caused some crop damage, which will reduce the extent in which food supply can be improved.
The RBI revised up its inflation projection for Q3 FY21 (April 2020 to March 2021) to 6.8 per cent, Q4 FY21 to 5.8 per cent from 4.5 to 5.4 per cent for H2 FY21 previously, and projects inflation to range 4.6 to 5.2 per cent in H1 FY22.
It expects rural demand to strengthen further and for urban demand to gain momentum as easing COVID-19 restrictions aids activity and employment. Besides, the RBI has revised up its growth projection to a 7.5 per cent contraction in FY21 from 9.5 per cent contraction in the October statement.
