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Lok Sabha Election results: BofAML expects 100 bps rate cut by RBI in 2019, recapitalisation of PSU Banks

Lok Sabha Election results: BofAML expects 100 bps rate cut by RBI in 2019, recapitalisation of PSU Banks

Lok Sabha Election results: BofAML expects 100 bps rate cut by RBI in 2019, recapitalisation of PSU Banks
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By Pranati Deva  May 24, 2019 11:45:24 AM IST (Published)

With BJP-led NDA set to form government at the centre, BofAML said it expects a cut in lending rates, increasing liquidity stimulus, and expansion in GDP .

With Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) set to form government at the centre, Bank of America Merill Lynch (BofAML) said it expects a cut in lending rates, increasing liquidity stimulus, and expansion in GDP (gross domestic product).

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Cheering the massive mandate given to Prime Minister Narendra Modi, the Sensex hit 40,000, while the Nifty crossed 12,000-mark intra-day deals on Thursday. However, moving ahead the markets are expected to shift its focus from the poll outcome to macro issues.
"While markets reacted to polls, we see the Indian cycle largely driven by the global cycle than who sits in Delhi," BofAML said in a report.
The investment bank estimated a 35 basis points (bps) cut in repo rate on June 6 by the Reserve Bank of India (RBI) monetary policy committee (MPC) to support recovery, pull down yields and provide room for further rate cuts in 2019. "A 100 bps cut in 2019 with May inflation tracking a low 3.3 percent," it said.
One basis point is a hundredth of a percentage point.
"The BJP manifesto has itself committed to stepping up investment by reducing the cost of capital. It presents a roadmap to expand GDP to $5 trillion by 2025 through a step up in infrastructure investment (to 10 percent of GDP from about 4 percent now) by cutting down the cost of capital," BofAML said in its report.
Along with rate cut, the RBI should continue to inject $2-3 billion of durable liquidity a month to surplus liquidity and the ministry of finance should recapitalise PSU banks with excess RBI capital released by the Jalan report, it added.
A high-level panel led by former RBI governor Bimal Jalan, set up to decide the appropriate capital reserves that the central bank should maintain, is likely to submit its report by June.
The investment bank said it expects the July Budget to observe the 3.4 percent of GDP fiscal deficit target set by interim finance minister Piyush Goyal in February and continue to point out that fiscal deficit cuts have not led to lending rate cuts.
"The Modi government has reiterated its commitment to fiscal prudence by not following the Congress’ universal basic income – NYAY – proposal of a steep 1.9 percent of GDP even in the heat of polls," it added.
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