New Delhi [India], May 22 : The Reserve Bank of India (RBI) is expected to go for deeper interest rate cuts as part of its policy response to slower economic growth and controlled inflation, according to a report by Morgan Stanley.
The report said that the policy approach is likely to remain countercyclical, meaning the RBI would take steps to support the economy when growth slows down.
It said, "We expect the RBI to respond with a deeper easing cycle, premised on slower growth, while inflation remains under control."
Morgan Stanley expects the central bank to carry out a total rate cut of 100 basis points (bps) in this easing cycle. Out of this, two more rate cuts of 25 bps each are expected going forward.
It also expected the RBI to bring down the repo rate to 5.5 per cent with a total easing of 100 bps. It added that risks remain tilted towards more rate cuts if global growth weakens further, particularly if there is a recession in the United States, which could hurt India's growth even more.
The report added that if the global economy slows down more than expected or if inflation in India moderates at a faster pace, the RBI could extend the rate easing cycle beyond what is currently planned.
In addition to cutting interest rates, the RBI is also expected to use other tools to support the economy. These include measures to ensure enough liquidity in the financial system and easing of regulations to boost credit growth.
On the fiscal policy front, the report said that the government is expected to stay on its planned path of fiscal consolidation as outlined in the Union Budget. The focus will likely remain on increasing capital expenditure (capex) to drive growth.
The report also noted that while monetary policy will continue to support the economy, it may not fully offset the impact of slower growth. RBI's efforts are expected to serve as the first line of defense as domestic economic concerns rise.
The RBI is also expected to remain flexible and take additional steps depending on economic needs, including maintaining adequate liquidity and supporting credit growth through macroprudential easing.
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