Market would Welcome over 25-bps Cut
The bank changed its call from a subsequent hold to a final 25 bps cut later in the year. Moreover, about a month ago, the government reduced public small savings interest rates by 60-130 bps, ensuring such schemes would be aligned with market rates, a signal for a lower interest rate regime. Government bond yields, which stubbornly remained elevated even a month ago, have dipped about 30-35 bps after the Budget, factoring in a cut of at least 25 bps. Anything more would be welcomed by the market.
“If RBI indeed frontloads the rate cut, it will be a positive surprise for both debt and equity markets,” said Nilesh Shah, CEO of Kotak Mahindra Asset Management Co.
The lack of cash in the system has meant that transmission of rates hasn’t been happening as quickly as RBI would like. Putting a liquidity framework in place could well prompt banks to do that and slash rates to encourage borrowing.
“We expect RBI to address the issues of systemic liquidity,” said SBI chair man Arundhati Bhattacharya in a note. “Currently, the issue of high volatility in currency holdings of public (both in the form of cash and jewellery) as well as government’s cash balances with RBI is leading to volatility in system liquidity.” Growth is dependent on consumption and public spending as private investment lags behind.