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Lending rate cuts key to economic recovery: BofAML

According to BofAML, growth is stuck at an 5% (in old GDP series), well below estimated 7% potential

Press Trust of India  |  New Delhi 

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Lending rate cuts are the only viable way to economic recovery as they would perk up demand and push investments, a report has said.

The report said that take a long time of 5-10 years to reflect in growth rate or reviving the stranded projects.

In a research note, said, "Lending rate cuts hold the key to recovery. They would push up demand, put idle factories to work, and spark off when capacity is exhausted, in our view."

The report further said that with 2017-18 likely to see sufficient $35 billion of reserve money, should come off 25 bps (0.25 percentage point) before the October-March busy season sets in (and 50 bps by September 2018).

Lending rate cuts are the only viable route to recovery rather than which can take a long time of around 5-10 years to reflect in growth numbers, it adds.

"We never shared the market enthusiasm for reforms (as it can take 5-10 years to show up in growth) or clearing 'stalled' projects (given idle capacity)," the report said.

According to BofAML, growth is stuck at an "anaemic 5 per cent (in old series), well below our estimated 7 per cent potential", as high real are constricting domestic demand in a long global recession.

Regarding the Reserve Bank's monetary policy stance, the report said that the central bank is expected to key policy rates by 25 bps December 6 policy review meet as inflation is expected to normalise and stay well within the RBI's 2-6 per cent range.

The next policy review meet is scheduled on October 3-4.

RBI reduced the repo rate by 0.25 per cent to 6 per cent in August, citing reduction in inflation risks. The rate cut was the first in 10 months and brought policy rates to a near 7-year low.

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

First Published: Fri, September 22 2017. 15:23 IST