BofA Securities on Wednesday indicated that it expects the Reserve Bank of India to cut the repo rate to 4.9% by March 2020 and 4.35% by September 2020 if global growth slows, and also said fiscal deficit is anticipated to slip to 3.8% of the GDP this year. BofA Securities also predicts the 10-year benchmark yield to hit 6.3% by March 2020.
Indranil Sen Gupta, economist and co-head, India Research at BofA Securities, pointed out that one of the reasons why growth has come down since 2014 is that real lending rates have gone up.
“The only way out in my view to reduce this rise in real lending rates is to offer subvention. Right now, bank loans to the micro and small industries sector is about Rs. 10,50,000 crore. One percent subvention is Rs. 10,500 crore and 2% subvention is about Rs. 21,000 crore, which is 0.01% of the GDP. If you offer this for one year, you will sacrifice only 0.01% of the GDP but the whole SME sector will get the advantage of their lending rate coming down by 200 bps,” he said.
Sen Gupta also believes that inflation may peak at around 6-6.5% in December depending on how fast onion prices come down. He explained that the advantage of cutting the repo in February is that you will be able to bring down the interest rate for SMEs and retail that is linked to the external benchmark in the busy season.
“Another view could why should there be a rate cut when the real policy rate is in negative. If you do that, you will have to wait till April, because in March we expect the inflation to come down to 4.6%. Then if you say that you want the inflation rate to go back to 4%, you will have to wait till September or October. The point is you have to trade-off — you want a temporary negative real rate to support growth in the busy season,” he explained.
Sen Gupta pointed out that he does not expect any significant appreciation in the rupee even as the central bank will continue to recoup forex reserves.
Source: Financial Express