RBI may cut reverse repo by 50 bps: Angel

MUMBAI: The Reserve Bank of India is likely to maintain status quo in respect of policy rates in its annual review on Tuesday but 50 basis points cut in reverse repo rate is not ruled out, says Angel Broking.

���At present, across the global economy, central banks are resorting to unprecedented quantitative easing to help bring down interest rates and unfreeze financial markets. The RBI has also announced its intention to provide about Rs 80,000 crore of funds in the first half of FY2010 to keep government bond yields low. This is likely to have a much stronger transmission effect than rate cuts have had so far. Liquidity is ample in the system ��� banks have parked about Rs1.5lakh cr in government bonds over and above the regulatory requirement. In fact, banks are so flush with liquidity since the beginning of April 2009 that they have been parking a massive Rs1.1lakh cr with the RBI under the LAF window on an average on a daily basis.

In light of this large liquidity overhang, in our opinion the RBI may maintain status quo in respect of policy rates in the upcoming policy, preferring to save the ammunition left with it for circumstances that are more demanding. However, we do not rule out the possibility of a 50bps cut in the Reverse Repo rate to further encourage banks to lend to the private sector. Overall, we expect the RBI to maintain an unequivocally accomodative stance as the key priority for the economy is to maintain a downward trend in interest rates so that domestic demand starts reviving,��� the Angel note said.