There is adequate scope for the repo rate to decline by at least 100 basis points from the current levels, according to State Bank of India’s economic research report, Ecowrap. Repo rate is the interest rate at which banks draw funds from the Reserve Bank of India (RBI) to overcome short-term liquidity mismatches. Currently, this rate is at 4 per cent.
Since the beginning of this calendar year, the RBI has cut the repo rate by 115 basis points from 5.15 per cent to 4 per cent.
SBI’s economic research department believes that aggressive rate cuts could limit the cost of government borrowings.
In this regard, the report observed that inflation is set to decline precipitously from the current levels to below 3 per cent and average growth during FY22 will be less than 1 per cent.
Asset quality of banks
Further, the asset quality of Indian banks, as per RBI’s own study, is sensitive to real rates apart from a ‘reservation’ credit growth, it added.
While it would not recommend interest rate caps (on government bond yields) in the Indian context, unless the situation deteriorates drastically, Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, suggested that the RBI could at least communicate to the market that it is comfortable with a risk spread of 10-year yields and repo rate over a certain level, say 100 basis points.
Referring to the monthly trend of money multiplier, the report said it is showing a declining trend since August 2018 when it was at 5.80.
Money multiplier refers to how an initial deposit can lead to a bigger final increase in the total money supply
“The increase in digital transactions has also played a critical role in the decline in money multiplier, which has changed the composition of financial saving of households away from currency to some extent.
“In particular, there has been a substitution from currency and much of it has gravitated towards digital mode of payments,” the report said.
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