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Reserve Bank of India Repo Rate Forecast Report September 2020

The RBI is expected to hold the interest rate at the 29 September meeting, according to a unanimous vote by 17 economists on Finder's panel.

Meet our panel

NameOrganisationJob title
Siddhartha SanyalBandhan BankChief economist and head research
Prithviraj SrinivasAxiscapital, wholly-owned subsidiary of Axis BankExecutive director and economist
Indranil PanIDFC FIRST BankChief economist
Sachchidanand ShuklaMahindra GroupChief economist
Rucha RanadiveCARE Ratings LtdEconomist
Radhika RaoDBSEconomist
Upasna BhardwajKotak Mahindra BankSenior vice president
Akash DoifodeWorlddata.aiEconomist
Anuj PuriAnarock Property Consultants Private LimitedChairman
Ankita PathakEdelweiss FinancialEconomist
Jayesh KumarManappuram FinanceChief economist
Radhika PiplaniYES BankEconomist
Mridul MehndirattaThe Wealth DialoguesIndependent researcher and writer
Amol AgrawalAhmedabad UniversityAssistant professor
Gauri SharmaRoha Asset ManagerEconomist
Nikhil GuptaMotilal Oswal Financial Services LtdEconomist
Aditi NayarICRA LimitedPrincipal economist

Key findings

  • Finder’s panel unanimously expect the RBI to hold the rate on 29 September
  • 65% of the panel forecast positive GDP growth by the first half of 2021
  • The majority of panellists don’t think that the government is doing enough to support the economy

Forecast for 29 September

The Reserve Bank of India is expected to hold the repo rate on 29 September, according to a unanimous forecast from Finder’s panel of 17 economists. However, 12% (2/17) think the Bank should cut the rate by 25-50 basis points.

IDFC FIRST Bank chief economist Indranil Pan is part of the majority who think the Bank will and should hold the rate in September, given CPI inflation is currently above the MPC’s tolerance threshold.

“Despite the weakness in growth and a widening of the negative output gap, retail inflation remains higher than the upper limit of the inflation targeting zone. The pandemic has affected both the supply side as also the demand side and hence the inflation momentum has been confusing. We therefore believe that the RBI will pause to assess and gain comfort on the direction of inflation before making the next move,” he said.

However, several economists noted that while the Bank should take a wait-and-see approach this time around, a rate cut could be on the cards once the inflationary pressures ease off.

Bandhan Bank chief economist Siddhartha Sanyal put it this way:

“… one notes that the current upsurge in inflation remains primarily due to supply disruptions for primary articles and an uptick in prices of energy products and precious metals, rather than any demand overheating in the economy. Rather, we expect the CPI prints to soften during the second half of the current financial year (ending March 2021). Thus, on balance, we expect the MPC to stay on hold in the current meeting even though we do not rule out more monetary easing over the next 3-6 months.”

YES Bank economist Radhika Piplani thinks that the Bank could cut the rate by as much as 50 basis points in late 2020 or early 2021:

“… a breach of 6% threshold for three consecutive quarters would technically be tantamount to failure of inflation targeting objectives as outlined under the RBI Act. While caution is warranted to uphold the central bank’s inflation-fighting credibility, the need for continued support to grow during these unprecedented times would also reassert itself as the impact of COVID continues to play out both globally and domestically. Accordingly, we expect up to 50 basis points of monetary easing to be delivered in December 2020/February 2021 when inflationary pressures are tamed.”

However, not everyone agrees that this approach is the right move for the MPC. Two economists – Manappuram Finance chief economist Jayesh Kumar and Edelweiss Financial Services economist Ankita Pathak – think that the Bank should cut the rate sooner rather than later. Kumar thinks the Bank should cut the rate by 50 basis points at the September meeting, while Pathak recommends a cut of 25 basis points.

Regardless of when it happens, 100% of the 16 panellists who responded to the question say the next rate move will be down.

The last rate move

It’s been more than three months since the last rate cut, and with the benefit of hindsight, we asked the panel if they think the MPC’s surprise decision in May was the right move.

The overwhelming majority of panellists (94%) think it was the right decision, while just one panellist, the Wealth Dialogues independent researcher and writer Mridul Mehndiratta doesn’t think that the committee timed it right.

Roha Asset Managers economist Gauri Sharma is part of the majority that thinks it was the right move and explained that the Central Bank has opted for an accommodative stance.

“By cutting the repo rate at 4%, which is a 15-year low, I think that the CB has allowed for growth in the credit environment by making an attempt to encourage new borrowers to enter the market,” she said.

Kotak Mahindra Bank senior vice president Upasna Bhardwaj said that given the weak economic conditions, there was a compelling need to keep policy rates low.

ANAROCK Property Consultants chairman Anuj Puri noted that it was impossible to predict if the policy measures would actually work, but that they needed to at least try to boost consumption.

Jayesh Kumar agrees the May rate cut was the right move and suggests it could have happened even sooner:

“Economic activities had suffered significantly due to the nationwide lockdown and pandemic. RBI should have cut the rates even earlier (mid April).”

Meanwhile, Mridul Mehndiratta – the only panellist to say that the May rate cut was the wrong move – says that the MPC should have left more ammunition in its arsenal for when there was more clarity on the direction of economic activity.

India’s economic recovery

Off the back of a 24% drop in GDP last quarter, the majority of panellists (65%) don’t expect to see positive GDP growth until the first half of next year.

Indranil Pan doesn’t think we’ll see economic growth until the new year, given that India has failed to flatten the curve, meaning that pre-COVID levels of production and consumption may be delayed.

“Consequently, job losses and salary cuts and reduction in the bargaining power of employees could lead to an erosion in the growth in disposable incomes and could delay the recovery. Structural bottlenecks to also remain a headwind to growth,” he said.

Ahmedabad University assistant professor Amol Agrawal said that he was optimistic about India’s economic recovery, but that a lot depends on how virus infections pan out:

“… One is hopeful that [the] virus will weaken in [the] first half of 2021, leading to a respite in economic growth. If the virus conditions remain as in 2020, the recovery will be delayed.”

A further 17%, including Axiscapital’s executive director and economist Prithviraj Srinivas, expect positive growth in the second half of 2021. Srinivas said that India will be operating as a 90% economy and recovery will be slow:

“… recovery from thereon will be more laboured due to consumption scarring given income declines and job losses. Besides, investment pullback this year will not be recovered easily. To top it all, India’s health curve hasn’t been contained yet and will impart uncertainty regarding demand as well as supply support.”

Meanwhile, Jayesh Kumar thinks we’ll have to wait until the second half of 2022 to see positive growth, given India’s rising case load:

“Adhoc local lockdowns/containment zones continue to wreak havoc on the prospects of recovery. The rural segment (relatively better placed) could come under severe pressure if fiscal response gets delayed further.”

One panellist, Mridul Mehndiratta, was particularly bearish, suggesting GDP growth won’t hit positive figures until 2023.

“With the rising COVID-19 cases, the pursuance of the re-opening of the economy seems to be a back and forth game wherein any attempts to normalise economic activity can be dented by an increase in the number of infections, forcing a slight step back,” she said.

“With the pay cuts, job losses and low discretionary spending, at least for the current fiscal year, gloomy sentiment can hinder the full blown economic recovery over the next year. However, my expectation is that as people get used to the new normal, along with the hope for a vaccine in the next six months or so, we might see businesses going full throttle, accompanied by people overcoming their apprehensions to step out.”

Is the government doing enough to support the economy?

The majority of the panel (65%) don’t think the government is doing enough to support the economy and has called for more fiscal stimulus. Some called for relief measures, while others argued for demand stimulation.

Mehndiratta said that the government should offer more relief measures for the informal sector, agricultural sector and small businesses in the form of tax breaks.

“The economy needs to be kept afloat before it can be stimulated in current times and hence relief measures are important,” she said.

Motilal Oswal Financial Services economist Nikhil Gupta was also in favour of more relief, noting that a “payroll protection or wage subsidy program would have been useful.”

Radhika Piplani said that India is one of the worst-hit countries by COVID-19, and that fiscal support of around 1-1.5% of GDP is underwhelming on both an absolute and a relative basis when compared to its peers.

“We expect more fiscal stimulus from the central government, focusing primarily on boosting private consumption and investment demand,” she said.

Worlddata.ai economist Akash Doifode shared his sentiment, saying that the government should start spending more and more both in rural and urban areas by bringing more money into schemes like MGNREGA, IRDP and Urban employment schemes:

“Also, the central government should take care of GST compensation to the state governments by tapping into foreign markets, as the local bond market is already heating up. In this challenging time, the government should care less about external vulnerability and rating downgrades.”

Gauri Sharma agrees that more government spending is needed:

“The government has to lift its foot off the break and spend. It has to allow the fiscal deficit to be negative and fund the same through borrowing, if need be. The GDP collections have been dismal and states are facing a shortfall of Rs. 3 lac crores in revenues on a consolidated basis, which should also be compensated.”

Pan conceded that the government has been doing its bit for lives and livelihoods and that there is no real stimulus to the economy, and that most of the fiscal slippage is likely to arise due to the erosion in revenues:

“I would like to see the government addressing both the consumption and also the supply side: a) tax reductions at the lowest income brackets/tax slabs, b) reduction in GST with a sunset clause for high-value items to kickstart consumption, and c) identify shovel-ready projects and push the accelerator hard in these projects – this will help create jobs and also create an environment for the crowding-in of private investments.”

CARE Ratings economist Rucha Ranadive was one of two (12%) economists who said that the government is doing enough.

“The government and the RBI have already announced a slew of measures to support the pandemic-hit economy. However, more fiscal and monetary support is called for given the moderate pace of economic recovery and the rising infection cases in the country,” she said.

Six-month economic forecast

For this report, panellists were most positive about housing affordability (24% positive) and most negative about wage growth (59% negative), employment (59% negative) and household debt (53% negative).

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