Reserve Bank of India's key lending rate can be reduced by another 100 basis points from the current levels to limit the cost of government borrowings, a SBI Ecowrap report said on Tuesday.
According to the report, there is adequate scope for repo rate to decline by at least 100 basis points from the current levels.
On May 22, the RBI reduced lending rates and extended the moratorium period for interest payments on term loans to mitigate the combined impact of demand compression and supply-side disruption on account of COVID-19 pandemic.
The Monetary Policy Committee (MPC) that time reduced the repo rate by 40 basis points to 4% from 4.40%.
Consequently, the reverse repo rate has automatically been reduced to 3.35% from 3.75%.
"With inflation set to decline precipitously from the current levels to below 3 per cent, average growth during FY21-22 to be less than 1 per cent and given that asset quality of Indian banks, as per RBI own study, is sensitive to real rates apart from a reservation credit growth...We believe aggressive rate cuts could limit the cost of Government borrowings," the report said.
In the current COVID-19 outbreak, the report said that RBI has taken a slew of liquidity measures to support the business and economy.
"With the various liquidity measures, the system liquidity position has turned to huge surplus of Rs 5 lakh crore in May, compared to Rs 3 lakh crore in March," the report said.
"The liquidity surplus now stands at Rs 4 lakh crore till 10 June '20. The Gross Borrowings of the Centre and States is Rs 21.6 lakh crore, with net borrowings at Rs 18.9 lakh crore."
Besides, the report said: "We would not recommend interest rate caps in the Indian context, unless the situation deteriorates drastically."
However, it recommended that RBI could "at least communicate" to the market that it is comfortable with a risk spread of 10 year yields and repo rate over a certain level, say 100 basis points.