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Aug 05, 2013, 10.54 PM IST | Source: PTI

RBI steps if prolonged could pull down GDP growth: BofA-ML

In two sets of announcements last month, the RBI had taken a string of liquidity tightening measures aimed at curbing speculation on the depreciating rupee, which has lost nearly 12 percent against the dollar since the start of FY14.

Foreign brokerage Bank of America- Merrill Lynch (BofA-ML) today said it expects the Reserve Bank to reverse its recent liquidity tightening moves only by October and warned that prolonging them may have an adverse impact on GDP growth which could slip to a low of 4.8 percent.

Also read: RBI measures here to stay; rate cut likely after Sept: HSBC

Stating that it sees the RBI reversing its tight liquidity measures only by October, the brokerage said if that does not happen, "it will adversely impact credit pick up in the busy credit season that begins from October to March, thereby having consequences on the growth front."

It said that in 1998 then RBI Governor Bimal Jalan had reversed similar measures undertaken, in eight weeks.

"GDP growth can go down to 4.8 percent, lower than 5 percent last year, if the lending rates go up as a result of the RBI steps," BofA-ML said.

In two sets of announcements last month, the RBI had taken a string of liquidity tightening measures aimed at curbing speculation on the depreciating rupee, which has lost nearly 12 percent against the dollar since the start of FY14.

The unconventional steps included limiting banks' overnight borrowing to 0.5 percent of their net demand and time liabilities, more sale of government bonds and raising the interest rate on the marginal standing facility for banks.

They had the desired impact on the rupee initially, but the domestic unit has been reporting losses since the July 30 announcement of the quarterly monetary policy review.

These steps hardened the rates in the money market. Banks are holding on to the rates for now, but they have indicated that eventually they might be forced to pass it onto borrowers. Private lender Yes Bank has already raised its base rate by 0.25 percent.

BofA-ML said the RBI will sacrifice up to 0.50 percent on the growth front to the ongoing battle to reduce the fall in the rupee and keep the domestic currency within the 58-62 band to a dollar.

The brokerage has already cut its FY14 growth forecast by 0.50 percent to 5.3 percent and FY15 GDP estimate by a similar measure to 6.3 percent. In the best case scenario, it said a rollback by RBI in August, coupled with good monsoons, monetary easing and dollar inflow through a sovereign or a NRI bond issue, has the potential to push growth to 5.8 percent in FY14.

READ MORE ON  RBI, pull down, GDP, growth, measures

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