Rate cut boost for economy?

Will the Reserve Bank of India give another rate cut boost to slowing economy? This question is on everybody's mind even as the apex bank and its six-member Monetary Policy Committee (MPC) gathered in Mumbai, the financial capital of India, to assess the macroeconomic trends and take a call on the direction that the monetary policy should take.

RBI will announce its monetary policy decisions on Thursday after three days of deliberations, but many are optimistic that it will go for another rate cut to boost the sagging economy. If RBI goes for a rate cut, the move will be third in a row and second consecutive one in current financial year that began on April 1 this year.

In February, apex bank took everybody by surprise by announcing a rate cut after a gap of 18 months. It reduced key interest rate at which it lends to banks by 0.25 per cent to 6.25 per cent.

Again, in April, RBI cut repo rate by another 0.25 per cent or 25 bps to 6 per cent. This second rate cut raised eyebrows as it came amid General Elections in which the Narendra Modi government retained power with more majority than what it got in 2014.

But the two consecutive rate cuts failed to boost economy as is evident from the disappointing GDP numbers during January-March 2019 period, the fourth quarter of last financial year which ended on March 31.

As per official data, gross domestic product (GDP) growth hit a five-year low of 5.8 per cent in the fourth quarter of FY19 thanks to sluggishness in agriculture and manufacturing sectors.

As consequence, India lost the world's fastest growing major economy tag to China which logged a GDP upswing of 6.4 per cent in the same period.

Eight core industrial sectors too hit slow lane. In April, the growth of core sectors fell to 2.6 per cent from a high 4.7 per cent in the same month a year ago. This is a tell-tale indication that GDP growth is likely to slow down further in the first quarter of current fiscal and beyond.

The other reason for RBI to remain dovish is the inflation which is under control. In April this year, the retail inflation, measured as consumer price index (CPI), inched up to 2.92 per cent on account of spike in food prices.

Still, it is much lower than the April 2018's reading of 4.58 per cent. Furthermore, it was within the RBI's target of 4 per cent.

Above all, unemployment rate went up to a 45-year high of 6.1 per cent in FY18 for which official data is now available. The Modi government allegedly prevented release of this key data before elections.

So, it saw light of the day after elections. This unprecedented rise in unemployment rate exposes chinks in the country's growth story. All these factors warrant an interest rate cut by RBI to boost economy at this crucial juncture.

Moreover, reduction of repo rate by mere 25 bps or 0.25 per cent may not be enough. The economy needs a 50 bps or 0.50 per cent rate cut. Is RBI listening?