Ace Apartment, Naxal, Kathmandu +977 1 4444607

Business News

RBI to cut rates by 25 bps in 3-4 months: Morgan Stanley

22 Apr 2009, 1149 hrs IST, REUTERS MUMBAI: RBI is likely to further lower its key policy rate by another 25 basis points over the next 3-4 months, Morgan Stanley said in a research note on Wednesday. "We believe that weak growth trend and further deceleration in inflation will provide comfort to continue with an easing policy," Chetan Ahya and Tanvee Gupta, economists at Morgan Stanley wrote in the note. Morgan Stanley expects India's economy to grow at 4.4 per cent in the current fiscal year largely based on the extremely weak global growth estimate. The central bank said on Tuesday, it expects India's economy to grow 6 per cent in 2009/10. "We believe that India will also suffer because of the excesses committed in the recent past. During the last four years, in parts India has also pursued loose monetary and fiscal policy, which fueled the growth," the economists wrote. "However, this is now showing up in the form of rising non-performing loans in the banking system and high burden of fiscal deficit and public debt. We believe the effect from these excesses will restrain the pace of growth recovery," they added. Banks were likely delaying passing on benefits of policy rate cuts due to lag in reprising fixed deposit maturity deposits, rising credit costs and risk aversion due to their concerns about credit quality of the borrower, the note said. "While we expect lending rates to decline further, we believe that will continue to lag the policy rates by six months". The central bank has since mid-October reduced the repo rate by 425 basic to 4.75 per cent, but public sector banks have cut prime lending rates by about 150 to 200 basis points in the same period. The investment bank said they do not expect any major problems in completion of the government's market borrowing programme, but if there was any discomfort, the RBI could resort to capping the reverse repo amount or increase the open market bond purchase amount. The government plans to borrow a gross Rs 3.62 trillion in the current fiscal year, out of which Rs 2.4 trillion worth of debt scheduled for the first half of the year.