Liquidity in the domestic banking system, which has tightened considerably since late May, will remain tight during the current fiscal, a Goldman Sachs research report said Thursday.
Besides, the deposit growth will not rise substantially, it added. “Our analysis of trends in the components of broad money (M3) suggests that liquidity will remain tight in FY11,” Goldman Sachs said.
It said the dominant view is that the liquidity tightness is temporary and when the government starts to spend money it has raised from the spectrum auctions for 3G and broadband wireless access services, the liquidity will ease.
The government has mopped up over Rs. 1 lakh crore from the 3G and broadband auctions, in addition to advance taxes, in the past couple of months, leading to tight liquidity.
Goldman said the Reserve Bank will raise its lending (repo) and borrowing (reverse repo) rates by another 75 basis points (0.75 per cent) during 2010 from the current 5.5 per cent and 4 per cent respectively.
The RBI has been tightening policy rates to deter consumer spending to check inflation, which has been in double digits for the past few months. The Central Bank is set to review its monetary policy on July 27, and is widely expected to raise the rates by 25 bps.
“We reiterate our GDP growth target of 8.2 per cent for FY11 and continue to expect effective policy rates to rise by 300 bps in 2010, with 225 bps already delivered and another 75 bps of rate hike ahead,” the report said.
On deposit growth, the report said it will continue at the current level. It has slowed from 22 per cent in June 2009 to 14 per cent in June 2010, and Goldman said it does not expect deposits to grow substantially higher than the current rate if banks do not increase rates.
It said, “our forecasts for currency in circulation, demand deposit growth and time deposit growth for FY11 are 16 per cent, 15 per cent and 15 per cent year-on-year respectively.”
