The Reserve Bank of India offices
The Reserve Bank of India offices in Mumbai. Image Credit: Bloomberg

Mumbai: Indian investors already facing a much-anticipated central bank decision this week will now have to juggle the implications of an economic soft patch and Donald Trump making good on his trade threat against the nation.

Growth cooled to 5.8 per cent in the first three months of the year, the slowest pace in several quarters. That took the expansion in the fiscal year to March 2019 to 6.8 per cent. The data has also intensified calls for the Reserve Bank of India to loosen monetary policy and the government to boost fiscal policy.

Added to the mix was the US announcing on Friday that it would terminate India’s designation as a developing nation effective June 5, eliminating an exception that allowed the country to export nearly 2,000 products to the US duty-free.

Governor Shaktikanta Das will probably reduce the repurchase rate by 25 basis points to 5.75 per cent on Thursday, according to 16 of 25 economists surveyed by Bloomberg.

“A third consecutive rate cut now looks a done deal at the RBI’s meeting” this week, Shilan Shah, senior India economist at Capital Economics, wrote in a May 31 note. “There is also a growing chance that the finance ministry, now under the stewardship of Nirmala Sitharaman, opts to relax its fiscal deficit target for this year.”

Despite the central bank’s two interest-rate cuts this year, borrowing costs in the economy aren’t coming down fast enough. Liquidity has also dried up in recent months as demand for cash picked up ahead of India’s six-week election.

That’s kept a lid on investment and consumption in the economy, and adds to pressure on the central bank to take more easing action. Not only by lowering interest rates, but also by adjusting its monetary stance to an accommodative one and injecting more liquidity into the financial system.

“Is there a room for rate cut? Yes, definitely,” said Suyash Choudhary, head of fixed income at IDFC Asset Management Ltd. “But unless the market is comfortable with respect to expectations on liquidity, those cuts will not get fully transmitted.”

Constrained by a widening budget deficit, Prime Minister Narendra Modi may increasingly look to the RBI for help in spurring lending and growth. Inflation has also been relatively benign, well below the bank’s 4 per cent medium-term target, giving policymakers ample room to ease.

According to Deutsche Bank AG, the net deficit on rupee liquidity has averaged $8 billion in the past six months. The Reserve Bank of India will look to possibly shift toward a surplus of between $2 billion to $4 billion over the next six months as it tries to fix the problems with the shadow banking sector and improve policy transmission, it said in a report.