The Reserve Bank of India could cut its repurchase auction rate, at which it infuses cash into the banking system, by 150 basis points more by mid-2009, Goldman Sachs said on Monday.
The reverse repo rate, at which the central bank absorbs surplus cash, could be cut by a further 100 basis points, the financial firm said in a note.
The Reserve Bank of India on Saturday cut both its key short-term rates by 100 basis points each to boost economic growth in the wake of a global credit crisis and recession in some major economies.
The repo rate is now at 6.5 per cent, and the reverse repo rate has been reduced to 5 per cent, its lowest in more than three years. Goldman expects a corridoor between 4 per cent and 5 per cent between the reverse repo and repo rate by mid-2009.
“The risks are clearly towards even more aggressive cuts as growth continues to falter, and inflation declines rapidly”, Tushar Poddar, economist at Goldman, said in the note.
The Indian economy will expand 6.7 per cent in the 2008/09 fiscal year ending in March and 5.8 per cent in the next fiscal year, according to Goldman’s estimates.
The government on Sunday unveiled a $4 billion stimulus package of extra spending for rest of this fiscal year. The government will also issue an extra $9 billion of bonds by Feb. 20, slightly higher than market expectations of $6-$8 billion.
While the government’s and central bank’s moves are positive, they are unlikely to materially alter the growth outlook of the Indian economy, Poddar wrote, adding that the country now does not have the fiscal space to substantially boost slowing demand.
However, the central bank’s rate cuts will lead to lowering of interest rates by banks and expects banks to slash lending rates 50-75 basis points in the coming weeks, Goldman said.