With growth conditions remaining weak and consumer price index based inflation heading towards moderation, the Reserve Bank of India could relax the repo rate (by at least 50 bps) in the next 6-12 months, according to industry body Assocham.
Repo rate is the interest rate at which banks borrow short-term funds from the RBI. Currently, it is at 8 per cent.
Assocham also recommended proactive liquidity management by RBI through a term repo calendar, along with expansion of the term repo window from the current Rs 89,000 crore to ease money market volatility and ensure credit flow to productive sectors.
In order to incentivise financial savings, RBI could recalibrate savings bank deposit rates to a minimum of 6 per cent, and keep it deregulated for rates above 6 per cent.
According to Rana Kapoor, President, Assocham, well-rated Indian banks with strong balance sheets should be allowed the flexibility to borrow through bonds and medium-term notes, in order to garner medium/long-term funds from good quality institutional investors.
This borrowing should be over-and-above 100 per cent of Tier-I capital and considered only for banks with acceptable International Risk Ratings with minimum tenor of three years, he added.
Banks were allowed to borrow up to 100 per cent of Tier-I Capital and swap it with RBI at a concessional rate — a facility that expired on November 30, 2013.
Assocham said the above mentioned facility could be made perpetual, provided the borrowing is subject to the overall limit of 100 per cent of Tier-I Capital and suitable tenor restrictions (minimum three years).