Focus on Policy Transmission - Mr Vikram Kotak, CIO, Birla Sun Life Insurance Co. Ltd

In an environment of deficit liquidity where repo rate is the operative rate RBI has rightly utilized the opportunity of narrowing the LAF corridor to 125bps by hiking repo rate by 25bps and reverse repo by 50bps. RBI has rightly continued with gradual normalization as the still uncertain global growth outlook may pose risk to domestic growth and any undue tightening will hurt the still budding capex and credit cycle. Given the environment of low deposit growth coupled with negative real interest rates, a clear message from the RBI to the Banking system, is to hike the deposit rates. We expect this to translate into higher lending rates in the subsequent months and, facilitated by the base rate, result in smooth transmission of monetary policy into the banking system. With expectations of tight liquidity, we foresee upward pressure on the short-term rates.

Source : Equity Bulls

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