This week official data released by the National Statistical Office showed that the consumer price index (which is a measure of retail inflation in the country) for the month of August despite climbing to a 10-month high of 3.2 percent stayed below RBI's medium-term target of 4. Further, IIP (Index of Industrial Production) grew at 4.3 percent in July, which is a slight recovery amid mounting economic gloom in the manufacturing sector.
RBI Rate Cut Expected
The two monthly data releases gave further rise to the possibility of another key rate cut in RBI's monetary policy meeting scheduled for 4 October. Brokerages expect a 40 to 50 basis point cut in the repo rate in the upcoming meet.
"Contained inflation and a larger negative output gap set the stage for policy easing in October. We expect 40 basis points (cut) cumulatively in Q4," Nomura, the Japanese financial services major said in a research note. It also said that RBI's GDP projection of 6.9 percent in August also appears to be "too optimistic" and it expects another forecast downgrade in the upcoming meet.
Bank of America Merill Lynch (BofAML) also has similar thoughts. "We believe there is a rising case for a 50 basis points RBI rate cut, on October 4, with August inflation coming in at a lower-than-expected 3.2 per cent," it said in a research note. BofAML said that lower yields or lending rates were important to incentivise investment and growth in the country by early 2020. Liquidity crunch has been hurting growth across various sectors that enable economic activity. "We see the RBI MPC cutting to a 4.5 per cent RBI repo rate by September 2020, if global growth weakens," it added.
In August's monetary policy discussion headed by governor Shaktikanta Das, the Central Bank made an unconventional rate cut of 35 basis points to 5.4 percent with a view to revive the Indian economy. It was the fourth consecutive interest rate cut in 2019, however, the previous three meets saw a rate cut of 25 bps each, that is in February, April and June.
Why your bank's FD and loan interest rates are set to fall in October?
After the August rate cut, RBI and the Finance Ministry urged banks to make a faster transmission of the repo rate cuts in their products. Banks, especially public sector banks, have made multiple interest rates since then on their MCLR as well as deposit interest rates.
To push its efforts, RBI has made it mandatory for PSBs to link their lending rates on floating rate loans to retail, personal and MSME borrowers to an external benchmark from 1 October. Under the external benchmark linking regime, interest rates shall be reset at least once in three months, as per regulations.
Banks have already launched retail loan products like home loans linked to repo rates, which means that with at least 50 percent of loan book linked to external benchmarks in October, a rate cut by RBI on the fourth of the next month will mean further fall in interest rates on loans.
Reduction in interest rates will also be made on deposits, so if you are planning to make a fixed deposit, it is advisable not to wait any longer.