RBI just a rate cut away from post Lehman lending rate

Reserve Bank of India
Reserve Bank of India (RBI)

Mumbai: When the RBI governor announces the decision of Monetary Policy Committee today all eyes would be on the quantum of policy rate cut.

India’s central bank is just 40 basis points away from bringing down the key lending rates near its historic low of 4.75 per cent (current repo rate at 5.15 per cent) reached in 2009 soon after the collapse of Lehman Brothers and the ensuing global financial crisis.

The factors that led to the global financial meltdown in 2008 and to slashing policy rates to record low, may well be different, but the December Monetary Policy Committee meeting will begin with the albatross around its neck, in the form of the GDP growth rate, which slipped to a six-year low for the September quarter.

“The current circumstances are difficult right now. We have an acute risk aversion in the system. At that time of the Lehman crisis, the external crises converted to domestic liquidity issue because of the capital flight. But at present, the liquidity squeeze is coming from the unresolved NBFC problems. The situation is similar and we need to keep working to fix it,” Abheek Barua, Chief Economist, HDFC Bank told IANS.

“Apart from cutting rates we also need to focus on solutions like the Federal Reserve did in the wake of the Lehman crisis. I am in favour of some kind of troubled asset relief program or a government entity buying out some of the liquid asset ..a kind of fund flow to the NBFC sector directly from the central bank,” Barua added.

Suvodeep Rakshit, Vice President & Sr. Economist, Kotak Institutional Equities said that there are some similarities between the current situation and the time of the 2008 financial crisis but most aspects are different. The current economic slowdown is structural in nature and given the extent of the slowdown, we see scope for 25-50 bps of rate cut over the December and February MPC meetings.

The central bank is widely expected to cut interest rates for the sixth straight time on December 5 despite a surprise spike in inflation, as the Reserve Bank of India (RBI) is likely to continue to focus on the sustained slowdown in India’s economic activity.

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