RBI likely to hold rates steady in August, but more cuts may be on the horizon: Nuvama
ADVERTISEMENT After a surprise front-loading of a 50 basis points rate cut and a shift to a 'neutral' stance in the last policy, the central bank appears to be signalling limited room for further easing.
However, Nuvama believes the case for more rate cuts remains strong.
The report underlines that domestic economic activity has visibly slowed in recent quarters. 'Corporates are contending with subdued revenue and profit growth, which in turn is inhibiting capex,' Nuvama noted.Simultaneously, households are facing weaker income growth and a deceleration in loan growth, dampening consumption demand.
ADVERTISEMENT Adding to the concerns, government expenditure is unlikely to provide a significant boost, while tax revenues have slipped below the 10% year-on-year mark. External demand also appears fragile amid global trade tensions.Consequently, several economic indicators — including credit growth, exports, auto sales, real estate transactions, and corporate profits — have decelerated to single-digit growth, resembling pre-pandemic patterns.
ADVERTISEMENT On the inflation front, the report highlights a benign landscape. Headline Consumer Price Index (CPI) inflation is near a six-year low, and core CPI (excluding volatile items) has remained below 4% for an extended period. 'Corporate commentary also suggests a lack of pricing power in the economy,' Nuvama stated.Additionally, the global macro backdrop, marked by narrowing US trade deficits and export redirection by surplus nations like China, is expected to remain deflationary.
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Given the current mix of benign inflation and weakening growth, the Nuvama report argues for further monetary easing down the line. Although the RBI is expected to hold rates steady for now, the possibility of returning to an 'accommodative' stance cannot be ruled out if inflation continues to undershoot expectations.'Systemic liquidity is ample and may remain so, and monetary transmission is progressing well,' the report added, suggesting that RBI has room to maneuver if conditions deteriorate.
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Nuvama also expects global central banks, particularly the US Federal Reserve, to resume rate cuts later this year. This could create further headroom for the RBI to follow suit, especially as fiscal policy in India remains broadly neutral to contractionary.All eyes will be on the RBI's forward guidance, which could offer clues about a potential shift back to an easing bias.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
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