DBS expects modest rate cut in October

Singapore: The Reserve Bank of India's Monetary Policy Committee will go for a modest rate cut at the October meeting following the corporate tax rate cut announced by the government, Singapore's DBS Bank has said.

"With this fiscal boost focused on investment revival and not consumption (hence not inflationary), we reckon that the RBI MPC might proceed with a modest cut at the October MPC," the bank's economist Radhika Rao wrote in commentary on the Indian economy on Monday.

"(RBI) Governor Shaktikanta Das also reinforced his dovish bias due to weak inflation and negative output gap," Rao noted in the report on the Indian government's corporate tax rate cuts.

The central bank is likely to watch these developments closely as risk-free rates rise, Rao said, adding that the equity markets surged on Friday, while risk-free yields ticked up.

On September 20, Finance Minister Nirmala Sitharaman announced to cut the basic corporate tax rate for domestic companies to 22 per cent from 30 per cent.

The effective tax rate for domestic companies was reduced to 25.17 per cent from 34.94 per cent inclusive of surcharge and cess.

The new effective rate takes India closer to its regional peers, on par with China, South Korea, Indonesia (announced an upcoming cut to 20 per cent) and OECD average, the report said.