The Reserve Bank of India might cut the bank rate in the upcoming busy season Credit Policy in view of the liquidity overhang in the domestic economy and lower interest rates abroad, feels the Institute of Economic Growth.
"We may expect a cut in the bank rate in the coming Credit Policy," IEG said in its latest report.
Bank rate is the interest at which the RBI extends credit to the commercial banks.
The economic thinktank said the excess liquidity in the economy and lower interest rate structures prevailing abroad, would "lead to further decline in the short term interest rates in India."
Citing that the prime lending rates were above 10 per cent, while short term interest rates were below 5 per cent, the Delhi-based institution said, "this huge spread discourages both savings and investments in the economy."
RBI had recently reduced the repo rate by 0.5 per cent to bring down the short-term rates further and "the lower interest rate structure continues," IEG said.
Probably banks, which were holding high forex reserves, must be waiting for maturity of the Resurgent India Bonds that bear high interest rates, it said.
With the foreign exchange pouring out due to maturity of RIB and widening trade deficit, rupee is unlikely to further appreciate against the dollar and reduce forex reserves in the coming months, it added.
