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This article is more than 2 year old.

Five reasons why BofAML expects RBI to cut rates by another 50 bps by March 2020

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BofAML is confident that RBI will reduce lending rates by another 50 bps by March 2020. The investment bank expects the weakness in the economy to continue for the next 1-2 quarters.

Five reasons why BofAML expects RBI to cut rates by another 50 bps by March 2020
Bank of America Merrill Lynch (BofAML) is confident that the Reserve Bank of India will reduce lending rates by another 50 basis points by March 2020 as the investment bank expects the Indian economy to remain weak for the next couple of quarters.
One basis point is a hundredth of a percentage point.
The RBI cut interest rate by 25 bps for the third time in a row in the June monetary policy meeting, changing the stance to 'accommodative' from 'neutral'. In a statement, it said that the Monetary Policy Committee has noted that growth impulses weakened significantly as reflected in a further widening of the output gap compared to the April 2019 policy.
RBI MPC changing its stance to accommodative support BofAML's 50bps rate cut-by-March call, they added. They also expect Finance minister Nirmala Sitharaman to retain the interim budget's 3.4 percent of GDP fiscal deficit target in her July 5 budget. Here are 5 reasons why BofAML expects further rate cut:
125 bps of RBI rate cut by March 2020
The investment bank expected 125bp of RBI rate cuts by March 2019 (75bp done) to send a powerful signal for lower yields/lending rates. They expect the RBI MPC to cut 25 bps on August 7 if rains are normal, pause as inflation goes up on base effects in end-2019 and cut again by the first quarter of CY2020.
$35bn of durable liquidity funds 16 percent loan demand
BofAML expects the RBI to continue to infuse durable liquidity of $2-3 billion a month via open market operation and/or FX swaps. Their liquidity model estimates that $35 billion of RBI liquidity ($10.7 billion) will generate sufficient deposits to fund 16 percent loan growth in FY20.
Reverse repo mode assures liquidity in 'busy' season
The RBI's comfort in allowing reverse repo mode in the April-September 'slack' season should assure the market of sufficient liquidity in the October-March 'busy' season, the report said. A 0.25 percent CRR cut should fund, say, Rs 1500 billion of creditworthy borrowers in case the NBFC situation worsens further, it added.
Lower risk allows lending rate cuts
Yields are coming down with RBI OMO set to clear the G-sec market. The Modi regime has surely demonstrated its commitment to fiscal discipline when it did not compete with Congress's NYAY plan of 1.9 percent of GDP even in the heat of polls. They expect finance minister Nirmala Sitharaman to retain the interim budget's 3.4% of GDP fiscal deficit target in the July 5 budget.
Policy measures to de-stress banks will ease lending rates
PSU bank recapitalization, rationalization of Bankruptcy Code through the June 7 NPL circular, deferral of tighter-than-Basel III capital to risk-weighted assets ratio and Indian accounting standards norms will destress banks. They expect the Ministry of Finance to recapitalize PSU banks with $14-42 billion of excess RBI capital to be identified by the Jalan committee.
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