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The RBI’s move to reduce the repo rate by a higher-than-expected 50 basis points is likely aimed at shrinking the time lag with which banks reduce their lending rates, according to Mr Naresh Takkar, MD & CEO, ICRA Ltd.
This will provide an early boost to investment and consumption sentiment.
“Based on the hawkish guidance provided by the RBI that the space for further reduction in policy rates is limited and the upside risks to inflation, we expect further repo rate and CRR cuts to be restricted to 25 bps each in FY13,” said Mr Takkar.
Marginal standing facility
The increase in limits under the Marginal Standing Facility (from one per cent to two per cent of their net demand and time liabilities) would also improve the liquidity situation.
The magnitude of the Central Government’s borrowing programme suggests that substantial open market bond purchases would be necessary for credit growth to expand in line with the 17 per cent projected by the RBI, said Mr Takkar.
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