India may see more rate cuts after budget: Kotak
22 Apr 2009, 1236 hrs IST, REUTERS
MUMBAI: India's central bank is likely to cut both its short-term rates by another 25 to 50 basis points after the announcement of the union budget by June, Kotak Mahindra Bank said in a recent note.
The Reserve Bank of India (RBI) is close to the end of its rate cutting cycle and further policy rate easing is expected to be "calibrated and gradual" as inflationary pressures pick up, economists Indranil Pan and Kaushik Das wrote in the note.
Kotak does not expect any cut in the central bank's cash reserve ratio, the proportion of deposits banks must keep with them as cash, which is at 5 percent now. The statutory liquidity ratio (SLR) requirement for banks is also unlikely to be changed as RBI may manage the government borrowing programme in a "non-disruptive manner", using auction based open market operations buybacks, it said.
Kotak retains its expectations for the growth of Indian economy at 6.5 percent in 2008/09 and sees it expanding at 5.5 percent in the current fiscal year that began on April 1. It expects wholesale price inflation to be in the negative territory soon on a favourable base effect, but sees it ending 2009-10 slightly above the central bank's projection of 4 percent.
The RBI's M3 growth projection of 17 percent for 2009/10 is expected to be inflationary, assuming its real GDP growth target of 6 percent and an average inflation of 4 percent, it said. The recent rate cut by the central bank was mainly to nudge private banks to reduce deposit and lending rates further, but Kotak said it estimates credit growth to slow down to 14-15 percent in 2009/10, even as lending rates are bought down.
"We expect comfortable liquidity situation to continue unless there is a bout of another serious de-leveraging in the global markets," the note said. However, the 10-year benchmark yield is not likely to dip significantly from current levels on fears of possible additional debt supplies by the end of the fiscal year and may revert to a 6.50-6.75 percent range as the market focuses back on the government's high borrowing programme, the note said.
Expectations of rising inflation in the second half of 2009/10 could also lead the reversal in bond yields and the budget of the new government is likely to determine the course of 10-year bond in the second half of the current fiscal year, it added.