The market strongly believes that the Reserve Bank of India (RBI) may reduce the repo rate by a huge margin of 40 basis points to bring the interest rate down to 5 percent, reports suggest.

If the Monetary Policy Committee (MPC) cuts the rate of interest at which the RBI lends to banks at its meeting on October 4, it will be the fifth successive reduction in the rates this year and fourth in the 2019-20 financial year. In August, the RBI cut the rate by 35 basis points exceeding the market expectation by 10 points.

With Finance Minister Nirmala Sitharaman under pressure to arrest sliding economic growth, the RBI has been more than obliging to the government demands for rate reduction to improve liquidity.

Since he took over as RBI governor, Shaktikanta Das, a former bureaucrat, has taken steps, including the transfer of Rs 1.76 lakh crores from the RBI reserves to the government of Prime Minister Narendra Modi which is struggling to meet its employment generation targets.

With the inflation remaining well within the targeted 4 percent, most economists see the RBI continuing to stay the course of monetary easing, especially because government measures, including the corporate tax cuts, have not sustained market optimism.

Some economists feel the present repo rate of 5.40 percent should be adjusted back to the traditional system of multiples of 25 bps, after the unconventional cut of 35 bps in August, a Business Standard report said.

Nirmala Sitharaman
Finance Minister Nirmala Sitharaman with Reserve Bank of India Governor Shaktikanta Das. The RBI monetary policy meeting on October 4 will continue to take the cue from the government's push for reversing the slowdown, economists feel. Reuters

So, at least in one leg, either in the October policy or thereafter, the central bank could cut the repo rate by 15 bps or 40 bps to make the cut at 50 bps or 75 bps, the report says.

"The cumulative space for rate cuts is 40 bps. Therefore, depending on the size of the cut in October, there is some more space, though limited," the report quoted Gaurav Kapur, chief economist at IndusInd Bank, as saying. He expects a rate cut of 15-25 bps.

"There is a demonstrated sense of urgency on the part of policymakers to boost growth. Also, inflationary pressures remain limited. Thus, we continue to see scope for further monetary easing in the coming months, including 35-40 bps repo rate cut in October," said Siddhartha Sanyal, chief economist and head of research, Bandhan Bank.

The Reserve Bank of India (RBI) headquarters in Mumbai.Reuters

Some experts see a major rate cut as an imperative because the climate of low inflation could turn if the oil prices surge on Middle East tensions. The US is increasing its military presence in the Persian Gulf and any misadventure by the Houthi rebels of Yemen could lead to further conflict between Saudi Arabia and Iran, whom Riyadh and Washington accuse of being behind the recent attacks on Saudi Aramco installations.

"We expect a 25-bps reduction in the repo rate in the October policy meeting. Given the weak demand level in economic activity, we expect the MPC to maintain its accommodative stance and expect the repo rate at 4.75 percent by FY21," the report quoted Anubhuti Sahay, chief economist at Standard Chartered Bank, as saying.