RBI unlikely to cut reverse repo rate: Goldman Sachs

MUMBAI: The Reserve Bank of India will hold its annual monetary policy meeting Tuesday and the jury is out in the open on whether the central bank will cut interest rates or not. Goldman Sachs in its preview report suggests that the RBI is not likely cut reverse repo rate but may reduce repo rate by 50 basis points.

���We think the RBI is unlikely to cut the reverse repo rate, which is currently the effective short-term policy rate, on April 21. There are several reasons for this. First, there is significant excess liquidity in the system. In the fortnight ended April 17, banks deposited in excess of $23 billion per day on average into the reverse repo window, compared to $7 billion a fortnight earlier.

Second, banks have still not passed through previous policy rate cuts, as spreads between benchmark policy rates and deposit and lending rates are at historic highs. Therefore, we think the RBI will likely cap the amount banks can put in the reverse repo window to incentivise a reduction in deposit rates and/or greater lending by banks, before cutting the reverse repo rate further.���

Third, although there is little near-term danger of inflation, and the emphasis is on boosting activity, the large fiscal borrowing requirement suggests the focus of the RBI will move towards monetizing the deficit,��� said Tushar Poddar, Vice President - Asia Economics Research at Goldman Sachs.