RBI may cut key interest rate by 25 basis points:

RBI may cut key interest rate by 25 basis points:

Context:

Amidst softening of inflation data over the last two months, the global finance financial service firm Morgan Stanley is expecting a 25 basis point reduction in policy rates during the upcoming meeting of the Reserve Bank of India’s (RBI) monetary policy committee next week.

Introduction:

• The Reserve Bank of India (RBI) is expected to reduce the key policy rate or the repo rate by 25 basis points (bps) to 6% in its monetary policy review meeting scheduled for August 2 while maintaining neutral stance on interest rates.
• According to Morgan Stanley, there will be limited scope for the RBI to go for more rates cuts in the backdrop of global central banks planning to further tighten their balance sheets.
• Expectation is  mainly due to fall in retail inflation, which eased to 1.54% in June
• If the RBI does cut the repo rate, this could only be the second such instance by the monetary policy committee (MPC) since it was established in October 2016.
• The Inflation for June was lower than the RBI’s target band of 2-6%.
• During the last policy review in June, the RBI revised its inflation projection downwards to 2-3.5% in the first half of the year and 3.5-4.5% in the second half-opening up the possibility of a rate reduction.
• The earlier projection for retail inflation in the first half of the fiscal was 4.5% and 5% in the second half.
• The Asian Development Bank’s latest estimate puts India’s average inflation in fiscal year 2018 at 4%, some 70 basis points lower than its estimate at the beginning of the year.
• Inflation based on the wholesale price index, or WPI, slipped to an 11-month low of 0.9% in June, with food inflation remaining negative and prices of manufactured items rising at a weak pace. Wholesale inflation has been on a downward trend since February
• The Wholesale Price Index also eased to 0.9 per cent from 2.17 %.