The RBI is likely to cut its repo and reverse repo rates by another 50 basis points at its policy review in late January,Goldman Sachs said in a note on Monday.
We also expect the cash reserve ratio to be cut by a further 150 basis points to release additional liquidity into the system in 2009,it said.
“The policy priority,in our view,would be to encourage banks to reduce deposit and lending rates as the spread between these and policy rates have widened significantly,” Tushar Poddar,economist at Goldman Sachs wrote.
The repo rate is expected to be brought down to 5 per cent from 5.5 per cent and the reverse repo rate is seen being lowered to 3.5 per cent from 4 per cent at the Jan. 27 policy review.
“We continue to expect GDP growth to slow to 6.7 per cent in FY09 and 5.8 per cent in FY10. At the margin,the fiscal and monetary measures announced will be positive for banks,NBFCs,and infrastructure companies,and limit further downside to growth,” Poddar wrote.
On Friday,the central bank cut its key lending rate to an 8-1/2-year low of 5.5 per cent and the government opened the corporate bond market to more foreign investment,eased overseas borrowing rules and promised more capital to state-run banks.
A Reuters poll in early December estimates India’s economic growth to slow to 6.8 per cent in 2008/09 and 6.2 per cent in 2009/10.
Goldman Sachs said going forward,the government should focus on removing supply-side constraints and implementing preannounced spending plans more forcefully,especially in infrastructure projects.