Softer lending rates are expected as the Budget will help banks cut rates by 50-75 bps by September to offset the impact of demonetisation in the second half of the current year, says a report. “We grow more confident about our call that Budget 2017 will help to cut lending rates by 50-75 bps by September to offset the impact of the demonetisation shock in the second half of 2017,” Bank of America Merrill Lynch (BofA-ML) said in a research note.
Finance Minister Arun Jaitley has cut the fiscal deficit target to 3.2 per cent of GDP for 2017-18 – lower than the 3.5 per cent target for 2016-17.
Government’s commitment to fiscal consolidation would help the Reserve Bank of India to allow an accommodative monetary stance amid low inflation levels, the report said.
“Fiscal consolidation should allow the RBI MPC to cut 25 bps on February 8 (and April), with CPI inflation likely to average 4 per cent until June,” BofA-ML said.
You may also like to watch this
On December 7, the central bank kept interest rates unchanged despite calls for reducing it and also lowered the economic growth projection by half a percentage point to 7.1 per cent in the first policy review post demonetisation.
The central bank will hold its next monetary policy meet on February 8.
It further added, “banks have already cut MCLRs after PM Modi’s December 31 speech. A RBI rate cut should translate into average lending rate cuts in the April-September ‘slack’ industrial season”.