Kolkata: Economic expansion and inflation forecasts for the current fiscal have been written down by the Reserve Bank of India after growth rate fell to a five year low, but a modest quarter point policy rate reduction raised skepticism whether the action is enough to lift investments.
With monetary transmission remained less than half for the first two rate cuts this year amid weakening investment and falling consumption demand, the market is now looking for some more impetus for growth.
"A 25 bps repo rate cut along with the change in policy stance to accommodative may mean that over a period of two months we might get a total of 50 bps cut including the current one,” said B Prasanna, group head for global markets at ICICI Bank. “Besides, if RBI decides to keep liquidity positive then that would act as a catalyst for animal spirits in the economy. This would prompt banks in aggressively buying assets with the surplus money leading to better transmission in money market rates fuelling higher corporate investment."
The benchmark 10-year bond yield closed lower at 6.93% from an intra-day high of 7.012% following RBI signals. HDFC Bank chief economist Abheek Barua said the announcement of a committee to review the liquidity framework could trigger the movement towards 6.8% in the short-term. “Global growth worries, increasing expectations of a rate cut from the US Federal Reserve, and decline in the oil prices could also support the momentum trade towards 6.8% in our view,” he said.
State Bank of India chairman Rajnish Kumar said the decision to lower the Basel III leverage ratio would augment the lendable resources of the banks. Besides rate cuts, the RBI will also be focusing on ensuring higher monetary transmission to revive growth.
This is the first time this year that all the Monetary Policy Committee members voted in favour of 25 basis point rate, and also for a change in the policy stance to accommodative from neutral, in a reflection that the falling investment have cast a bigger shadow on the economy.
The MPC observed that growth impulses have weakenedRead More – Source