- BOFA SECURITIES have stated that they expect Reserve Bank of India to cut the repo rate to 4.9% by March 2020 and 4.35% by September 2020 if global growth continues to slow down.
- Also BOFA expects the fiscal deficit to slip to 3.8% of the GDP this year.
- Further, BOFA predicts the 10 year benchmark yield to hit 6.3% by March 2020.
- The Economist and Co-head, of India Research at Bofa Securities Mr. Indranil Sen Gupta, also mentioned that one of the reasons why growth has slowed down since 2014 is that the real lending rates have gone up.
- Gupta also opined that the only way to reduce the rise in real lending rates is to offer subvention. As of now, bank loans to the micro and small industries sector is around Rs. 20,50,000 crore. One percent subvention amounts to Rs. 10,500 crore and 2% subvention amounts to Rs. 21,000 crore which otherwise is 0.01% of the GDP. Thus he added that if this is offered say for one year, the sacrifice would amount only 0.01% of the GDP. On the contrary the whole SME Sector
- Will reap the benefit and the lending rate would come down by 200 Basic points.
- Also the Co-head and Economist further feels that inflation has shot up to 7.1% as against the expected figure of 6.2% which is alarming.
- Thus, the advantage of cutting the repo in Feburary is that the interest rates should be brought down for SMEs and retail linked to the external benchmark in the busy season.
- Also, it is felt that why there should be a rate cut when real policy rate is in negative.
- By doing that, we should wait till April 2020 since in March there is speculation that inflation would come down.
- However for a further cut in the inflation possibly we should wait further say till October.
- For a trade off a temporary negative real rate is required which would support growth in the busy season. Also no significant appreciation is expected in the rupee value even if the Central Bank tries to increase in the Forex Reserves.
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