RBI to cut bank rates next year -- JP Morgan

RBI to cut bank rates next year -- JP Morgan
AGENCIES,

DEC 18: Even as the Reserve Bank of India governor, Dr Bimal Jalan ruled out any cut in interest rates on Saturday, investment banker, J P Morgan has said RBI is likely to cut its benchmark bank rate in the financial year starting April 2001 due to a more stable rupee, comfortable money market liquidity, record foreign exchange reserves, and an easing bias in global interest rates.

"JP Morgan projects a 50 basis point reduction in the bank rate to 7.5 per cent early in the first quarter of the next fiscal year," the securities firm said in a research report dated December 16.

The RBI bank rate is the rate at which the central bank lends to commercial banks. It is viewed as a reference rate for the banking system.

Globally, most of the major central banks barring Japan are expected to adopt a softening stance on rates with the United States expected to move to a "neutral bias" this week, it said.

In addition, India's balance of payments situation has noticeably improved, the currency appears to have stabilised and the government deficit is likely to stay within the target range, it said.

"A combination of these factors provides an excellent platform for the RBI to cut interest rates."

India's reserves hit a record peak of $39.476 billion on December 8, providing the central bank with adequate ammunition to fight any contingency, JP Morgan said.

The rise in reserves, a comfortable liquidity situation, reduced bond issue frequency and softening in international crude oil prices have been the main factors behind the recent improved market sentiment, JP Morgan said.

Yields are at their lowest levels since the bank rate was hiked by one percentage point on July 21 as part of a currency support package but they are still 25-30 basis points higher than at the beginning of the financial year, it said.

The benchmark 10-year government bond yield has declined around 60 basis points in the past three months to 11 per cent.

However, higher overnight rates in the next two weeks could see bonds giving back some of their recent gains. Call money rates are expected to be firm over the next two weeks as companies pay quarterly advance tax payments to the government.

This should be seen as an opportunity to selectively enlarge positions since the fundamental outlook remains bullish for bonds, JP Morgan said.

Fresh government issues seen continuing

JP Morgan said the government was expected to keep its borrowings within budgeted levels and meet its fiscal deficit target, but net issuances remained alarmingly high.

Total Central Government bonds outstanding are set to touch Rs 4.5 trillion ($96.2 billion) by the end of 2000/01 and rise to Rs 5.3 trillion (21 per cent of gross domestic product) next year - a three-fold rise since 1996/97, it said.

Over a third of the bonds will mature in less than five years and over 75 per cent within the next 10 years.

This leaves the RBI with no choice but to issue longer dated bonds. JP Morgan said in the coming year, 50-60 per cent of all bonds would be of over 10-year maturity.