02/06/2015 10:00 AM IST | Updated 15/07/2016 8:25 AM IST

Raghuram Rajan Expected To Cut Rates Today By 25 Basis Points

Hindustan Times via Getty Images
NEW DELHI, INDIA - DECEMBER 12: RBI governor Dr Raghuram Rajan speaks during the Bharat Ram Memorial Seminar at FICCI Federation House on December 12, 2014 in New Delhi, India. Rajan said when India pushes manufacturing exports, it will have China to contend with and an export-led growth will not be as easy as it was for the Asian economies who took that path before India. He also said that India should also focus on domestic demand and create a unified market with a view to reduce transactions cost. (Photo by Raj K Raj/Hindustan Times via Getty Images)

Reserve Bank of India Raghuram Rajan will hold a review meeting today, and the consensus among analysts is that he will cut rates by 25 basis points to 7.25 percent.

A Reuters survey found 38 of the 48 economists polled expected the RBI would cut the repo rate at the June 2 meeting, with 35 of those expecting a 25 basis points cut. This would be the third rate cut this year after January and March. A poll by the Economic Times also showed most analysts expecting a rate cut this time round.

There are several reasons for this expectation. One, inflation is under control and well under the 6 percent upper-end target of the RBI, thanks to low oil prices. This means that handling upward pressure on food prices in the event of inadequate rains is manageable. The meteorological department has said that India's monsoon is expected to be normal this year.

Second, the economy needs a boost, given dismal corporate earnings, lower manufacturing activity and lack of recovery in bank credit. A rate cut would help businesses get more loans.

And third, the Modi government has been clear that this is a good time to cut rates further. Both finance minister Arun Jaitley and chief economic advisor Arvind Subramanian, a former colleague of Rajan at the IMF, have said so.

Analysts believe that there might be another cut after today's, to reverse the three rate hikes from September 2013 to January 2014, when Indians were battling double-digit inflation.

It took until April for businesses and individuals to benefit from the first two rate cuts because banks, straddled with low liquidity, were reluctant to lend. Rajan admonished them for that, saying that "credit growth is tepid, banks are sitting on money and their marginal cost of funding has fallen. The notion that it hasn't is nonsense." Since then major banks such as State Bank of India, HDFC Bank and ICICI Bank have cut rates.

This time, banks might respond faster. “Banks can be expected to reduce their base rates by 25 basis points simply because this is a lean season and credit growth is weak so there is no pressure on bank earnings,” said Indranil Sengupta, chief India economist at Bank of America-Merrill Lynch.

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