RBI to reduce policy rates later this year? Report makes big predictions

A report by the American investment bank Goldman Sachs has predicted that the Reserve Bank of India (RBI) might cut policy rates by the end of the year, signaling the end of peak fiscal consolidation. It said that factorslike GST reforms,domestic regulatory easing, etc, will likely promote a recovery in credit demand.

What the Goldman Sachs report said about the RBI

"We expect an additional policy rate cut before year-end, and the recent GST simplification signals that peak fiscal consolidation is behind us. We expect this, along with domestic regulatory easing, to foster a gradual recovery in credit demand," the report said.

In the previous monetary police meeting, the RBI kept the policy rates unchangedat 5.5 per cent.

The report said several external factors, including elevated tariffs on exports to the United States, can temper creditdemand. Other factors include the H-1B visa issue,whichcould hamper IT immigration into the US.

"External headwinds continue to weigh on India's outlook, including tighter US immigration costs for H-1B visas that affect Indian IT services, in addition to elevated US tariffs (50 percent) on Indian goods; these factors could temper credit demand alongside broader macro uncertainty," the report added.

The Reserve Bank of India (RBI) Governors' monetary policy statement has opened up the possibility of another 25 basis points (bps) rate cut. However, the apex bank maintained the status quo on key rates.

Last month, the central government eliminated the 12 per cent and 18 per cent Goods and Services Tax (GST) slabs. It also placed most of the items in these categories into the lower 5 per cent and 28 per cent slabs. It also introduced a new 40 per cent slab for sin goods.

The measures were taken to boost domestic demand by leaving more money in the hands of the masses for discretionary spending.