RBI needs bigger rate cuts, liquidity action: Nomura

The RBI will need to deliver more rate cuts to ensure the same level of policy transmission to lower the cost of funding and support growth," Nomura said in a report today.

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Nomura said the central bank has wanted the repo rate to “remain the operative rate,” and has thus brought banking system liquidity into deficit to increase the effectiveness of India’s main lending rate. Now that RBI is in easing mode, the tight liquidity conditions would mean longer lags in the policy transmission.

Liquidity management has thus become a “top priority,” so Nomura expects RBI to undertake more open market operations and cash reserve ratio cuts, or opt for a cut in the statutory liquidity ratio, to ensure “effective” policy transmission.

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If RBI wants to support growth, “then a 100bp reduction in lending rates, for instance, would require more than a 100bp cut in the repo rate,” Nomura said.

Reuters