RBI's low interest rates will continue to support demand in Indian economy, says CLSA

The RBI's department of payment and settlement system has already withdrawn 104 circulars.

The Reserve Bank of India’s low interest rates will continue to boost demand in the Indian economy, even if the government scales back pandemic support, CLSA India Economist Indranil Sen Gupta has said.

"Of course, RBI will tighten, but rates are so low that lending rates will take some time to react to that. That will be a major driver of consumption demand going into next year," Bloomberg quoted Gupta as saying.

Also read: RBI likely to hike rates next year, full-fledged recovery on right path: Morgan Stanley

According to a survey by CLSA, over 70 percent of the respondents said they at lending rates as the “key reason” for availing loans.

Gupta expects the central bank to retain the accommodative stance, for now, and continue to withdraw surplus liquidity.

The former RBI economist said the recent reduction in fuel tax and a good harvest would help India's economic recovery, though the government can't incur fiscal expenditure like last year.

The RBI's monetary policy committee (MPC) is expected to hold key repo and reverse repo rates in the December meeting even though inflationary pressures are rising. The monetary policy meeting will be held from December 6 to 8.

"They may do more aggressive reverse repo operations. From April, we think RBI may begin to raise rates. We see 100 basis points hike in rates in the next fiscal year," Bloomberg quoted Gupta as saying.