RBI needs to go for large rate cut in June: SBI

Reserve Bank of India (RBI) logo is seen on the main entrance gate of the RBI headquarters in Mumbai. (AFP File Photo)

The RBI needs to go in for a larger rate cut, more than 25 basis points, in the next monetary policy review in June to reverse the current slowdown in the economy, said a research report by country's largest bank SBI.

The Reserve Bank of India (RBI) had cut the key short term lending rate (repo) by 25 points each in its last two policy reviews and is slated to announce the next bi-monthly policy on June 6.

"Are we currently facing a quasi growth slowdown? The apparent nervousness is clearly reflected in the trends exhibited in key stock indices," said the SBI's research report 'Ecowrap'.

Initial trends in the fourth quarter of 2018-19 exhibit overall decline in sectors such as telecom equipment and infra services; agrochemicals; petrochemicals; infrastructure developers and castings, it noted.

Also, pharmaceutical companies dependent on exports are likely to report poor growth numbers. In January-March 2018-19 quarter, of 384 companies more than 330 companies exhibited negative growth in mid-line and bottom line.

Perhaps, significantly depressed rural prices are disturbing rural income and weak demand is affecting the FMCG sector, the report said.

Overall, the report said: "We still believe the current slowdown could still be transitory if proper policies are adopted in the interregnum. For example, the high real interest rates are severely acting as an impediment to investment".

To this end, "we are thus pencilling a larger rate cut (in excess of 25 bps) by RBI in the forthcoming policy".

However, such larger rate cuts will still not be helpful, but the transmission will, said the Ecowrap.

The RBI should now ensure that the asset and liability side of banks move in tandem and ensure the repo rate is directly benchmarked to non-volatile bank liabilities /Current Account Savings Account (CASA) that are mostly used for transaction purposes. Otherwise, we would continue to be constrained by a lack of transmission, it added.

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