 "RBI signal in policy review: Forget rate cut this year")
This was the third policy review in a row when RBI kept the rate unchanged. Between September 2013 and January 2014, it had raised the rate 75 basis points — by 25 bps each on three occasions.
Though the status quo was widely expected, RBI’s hawkish tone disappointed markets, which were looking for an indication of when the rate cycle will turn — something the governor avoided. “We are saying that if disinflation proceeds as warranted, we will eventually have room to cut rates,” Rajan said, assuring RBI would not hold rates any longer than necessary.
Rajan said a “vigilant monetary policy” was the need of the hour, adding the next goal was to bring inflation down to six per cent by January 2016.
While the subdued pricing power of the corporate sector, non-oil global commodity prices and measures undertaken to improve food management are seen as factors that could bring down inflation, there are upside risks like pass-through of administered prices, uncertainty over monsoon, and the global oil prices. However, on balance, the RBI agreed the risks were more balanced now than in June, when the previous policy review took place.
The rate of consumer price index (CPI) -based inflation rose 7.31 per cent from a year earlier in June, compared with a rise of 8.28 per cent in May. RBI aims to bring down the retail inflation rate to eight per cent by January 2015 and six per cent by January 2016. Bankers interpreted the policy statement as a long wait before the turn of the rate cycle. “The target of six per cent retail inflation looks challenging and, to that extent, RBI will hold rates at least till the time it is not breached. So, banks will need to possibly factor a prolonged policy pause in their decision making,” said State Bank of India Chairman Arundhati Bhattacharya.
A disappointment over lack of favourable guidance was evident in the bond market; the yield on the 10-year benchmark government bonds shot up 11 bps to close at 8.61 per cent on Tuesday. “We think this market reaction suggests an unwinding of near-term monetary policy easing expectations,” said Standard Chartered Bank in a note to clients.
The central bank, however, reduced banks’ bond-holding requirements. The move could help inject an estimated Rs 40,000 crore into the system. The statutory liquidity ratio was slashed to 22 per cent from 22.5 per cent and the ceiling on debt that must be held to maturity (HTM) by 50 basis points to 24 per cent.
The decision to lower SLR was essentially in continuation of what the RBI did in June — it had cut SLR by a similar quantum then. Reacting to this, state-run Oriental Bank of Commerce (OBC) decided to reduce its deposit rate by 25 bps in some buckets. “The reduction will release Rs 1,000 crore for us. Since credit demand is sluggish, we have decided to lower the rates,” said S L Bansal, chairman & managing director of OBC. It is not clear if other banks will follow suit.
According to Rajan, the reduction in SLR was in line with the fiscal-consolidation path provided by the government. “The idea behind the SLR cut is, if the government finances are improving and the government is on a fiscal-consolidation path, we can afford to liberate more access to government financing and make it possible for the private and public-sector firms to get access to that financing,” Rajan said, adding there might not be any immediate impact but banks could get a help in planning for their borrowers when credit demand picked up.
CARE Ratings said the current SLR of banks was at 26.7 per cent of net demand and time liabilities as on July 11, 2014. In a sample of 39 banks (both private and public), five maintained SLR below 25 per cent, while the figure for the resr was above 25 per cent as on March 31, when the SLR was 23 per cent. “Therefore, the actual impact might be limited to the banks that are on the fringe of this ratio,” it said.
India Inc, which was disappointed, said the central bank could have leveraged reducing inflation risks to effect a rate cut, as the high cost of credit discouraged industry from going for capacity expansion. “It is causing financial stress among the firms for which demand is credit-driven,” Confederation of Indian Industries Director-General Chandrajit Banerjee said. Assocham President Rana Kapoor said RBI’s pronounced bias in favour of bringing down inflation might not help revive growth to the extent of its potential — of six per cent in the current financial year.
Stock markets were happy with the SLR cut, as players hoped the move would enable banks to provide more credit. The Sensex went up 185 points as rate-sensitive automobile, consumer durables and realty shares notched up handsome gains. While the BSE Auto index was up 2.11 per cent, the BSE Realty index rose 2.65 per cent. The banking index, after falling earlier in the day, rose after the RBI policy announcement, to close 0.28 per cent higher than its previous close.