India’s largest lender the State Bank of India (SBI) in its monthly ‘Ecowrap’ report has said that, the Reserve Bank of India (RBI) is likely to cut the policy repo rate by 35-50 basis points (bps) in the forthcoming monetary policy review.
The economic research department of the SBI expects gross domestic product (GDP) growth for Q4 (January-March) FY19 at 6.1 percent. The report also stated that the Gross value added (GVA) growth could be at six percent, or slip marginally below 6 percent at 5.9 percent.
Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI said that, “We still believe the current slowdown could be transitory, if proper policies are adopted in interregnum. For example, the current high real interest rates are severely acting as an impediment to investment.”
We are thus penciling a larger rate cut (in excess of 25 bps) by RBI in the forthcoming policy, he added.
The RBI, for the first time, could use the rate change in non-multiples of 25 bps as a first step towards providing second-generation signals to the market of future policy stance. However, even such larger rate-cuts will not help fully, but its transmission will, the report stated.
To this end, the RBI should now ensure that asset and liability sides of banks move in tandem and ensure repo rate is directly bench marked to external benchmark/non-volatile bank liabilities/ current account, savings account (CASA) that are mostly used for transaction purposes.
The financial system would continue to be constrained by lack of transmission, even as the RBI continues to cut rates, the report stated.