Mumbai: Global financial services major Nomura on Tuesday said the Reserve Bank may reduce the key interest rates by 25 basis points at the forthcoming review of the monetary policy on June 18.

"We are changing our policy rate call. We now expect 50 basis points of additional repo rate cuts in 2012 (terminal repo rate of 7.50 percent), compared to our earlier forecast of 25 bps in 2012, due to the continued weakness in domestic demand and rising downside risks to the global growth outlook, coupled with moderate core inflation, with a 25 bps cut at the next policy meeting on June 18," Nomura India chief economist Sonal Varma said in a note.
She said while sluggish growth, low core inflation and weak policy rate transmission argue for a more aggressive 50 bps rate cut, our base case is a 25 bps rate cut due to elevated headline inflation (primarily due to persistently high food inflation).

Varma further said she is not expecting a reduction in the cash reserve ratio (CRR) on June 18, "as liquidity is closer to the RBI's comfort zone and open market operations can be used to address the liquidity mismatch. Moreover, the CRR at 4.75 percent is close to the all-time low of 4.50 percent and needs to be kept ready as an emergency buffer to inject liquidity if conditions worsen."

However, she warned that interest rate cuts are only a quick fix to growth, and pointed out that the current slowdown is largely a payback from continued fiscal excesses and reflects slow government decision-making over the past year and that real effective exchange rate depreciation has already started to ease monetary conditions.


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