Goldman Sachs sees scope for more rate cuts by RBI

Financial major Goldman Sachs on Monday said there is still room for infusion of liquidity by the apex bank, despite the fact that the Reserve Bank has lowered rates aggressively since the economic crisis hit India. "Although there is still room to cut the cash reserve ratio (CRR), and we think they (RBI) will cut it by 150 basis points by mid-2009, the bulk of the rate cuts is behind us," Goldman Sachs Economist Tushar Poddar said in a research note. The central bank has lowered the CRR, the percentage of cash deposits banks are mandatorily required to keep with the central bank, from a high of 9 per cent in the third quarter of this fiscal to the current level of 5 per cent. The global financial services firm said it expects the RBI to continue with limited quantitative easing by purchasing government securities to help maintain liquidity, fund the deficit, and keep yields from ratcheting up sharply. "We think, however, that large-scale quantitative easing, by monetising the deficit, can create a large monetary overhang, which can eventually lead to rampant inflation when demand returns," he said. Poddar further said that first the RBI can gradually transfer the roughly USD 20 billion deposits sequestered under the Market Stabilisation Scheme (MSS) to government accounts. But eventually, the apex bank would purchase government securities and thereby release liquidity into the system, Poddar said. "We think the monetising of the deficit, even though limited, will put pressure on the Indian rupee to weaken in the near term," he added.