 "Wait for a rate cut just got longer")
Reserve Bank of India Governor Raghuram Rajan on Tuesday underscored his reputation as an ‘inflation hawk’ by keeping the benchmark lending rate unchanged in a fourth straight monetary policy review.
Most market participants said they expected a “prolonged pause” on rates, as the rate of retail inflation was unlikely to fall to six per cent before January 2016 — the target set by the central bank. “We expect interest rates to remain on hold until the end of 2015. The RBI’s framework puts a higher weight on policy stability and positive real rates,” Nomura said.
Samiran Chakraborty, managing director & regional head of research (South Asia Global Research) at Standard Chartered Bank, said he expected the RBI to be on an “extended pause” (no rate cut in 2015) as the disinflation process took shape and the government took necessary steps to improve food supply.
Speaking to the media later, Rajan said: “As of now, we are reasonably set to reach that target but a lot can happen in the world. Oil prices, which are low now, could go up or could become even lower. Every other factor is subject to some uncertainty. The policy will be contingent on data.”
Rajan spoke about other positives on the inflation front, like stable exchange rates and a tempering in rural wage growth but also pointed to risks like the evolution of food prices following deficient monsoons.
He said the target of having inflation at eight per cent by January 2015 was easier than the “harder” task of getting it down to six per cent by January 2016. Rajan refrained from giving any indication on when he would lower rates, except saying any future monetary policy action would be contingent on data. “If data come in and say we are going to miss the six per cent inflation target, we will have to tighten. If data come in and say we will do better than six per cent earlier than January, we will have room to be more accommodative. Currently, we are appropriately positioned.”
Among other measures, the RBI reduced liquidity provided under the export credit refinance facility to 15 per cent of eligible export credit outstanding from 32 per cent, and said it would lower the amount of bonds banks could hold without marking to market (in tranches of 50 basis points between January and September 2015).
Rajan took further steps to buffer the rupee after the US projected a steeper increase in borrowing costs next year. The RBI raised the amount of government bonds that banks hold as ‘high-quality liquid assets’, which could be used to borrow emergency funds when market conditions require liquidity additions, and allowed importers to hedge more of their foreign-currency payments.
The RBI left the statutory liquidity ratio and cash reserve ratio requirements unchanged, but said it would gradually lower the ceiling on the amount of bonds that must be held until maturity to 22 per cent from 24 per cent, by September 19, 2015. The statutory liquidity ratio is the portion of deposits banks must invest in safe assets like government bonds.
The stock market surrendered most of its early gains after the monetary policy announcement, and closed only 33 points higher than its previous close, on selling in interest-sensitive stocks of banking and realty stocks. In highly volatile trade, the 30-share BSE Sensex opened higher and rose to the day’s high of 26,851.33, a jump of 254.22 points from previous close, but shed most of its gains to close at ‘26,630.51. Brokers said the RBI action was largely in line with investors’ expectation and had little impact on buying by participants, but profit-booking at improved levels minimised the gains, spread over a broad front. The central bank also said that while deposits had been growing at a faster pace than credit, a slowdown in credit offtake was due to a variety of reasons, including the corporate sector raising resources from alternative sources like commercial papers. Bankers said lower credit offtake when liquidity was comfortable might lead to trimming of deposit rates to maintain margins, as yield on advances had come down.
“Considering that the system has sufficient liquidity, credit has not picked up, companies have various avenues to raise funds, and investment climate is yet to turn around, banks might reduce their deposit rates going forward. Some large banks have already done so,” said Indian Bank Chairman & Managing Director TM Bhasin, who is also the chairman of Indian Banks’ Association. State Bank of India, which has a comfortable liquidity position, recently reduced its deposit rates for select tenures.
Most market participants said they expected a “prolonged pause” on rates, as the rate of retail inflation was unlikely to fall to six per cent before January 2016 — the target set by the central bank. “We expect interest rates to remain on hold until the end of 2015. The RBI’s framework puts a higher weight on policy stability and positive real rates,” Nomura said.
Samiran Chakraborty, managing director & regional head of research (South Asia Global Research) at Standard Chartered Bank, said he expected the RBI to be on an “extended pause” (no rate cut in 2015) as the disinflation process took shape and the government took necessary steps to improve food supply.
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In a move that was widely expected, the Governor maintained the repurchase rate at eight per cent and said while the near-term retail inflation outlook was balanced, “with a slant to the downside”, risks to the January 2016 target of six per cent were “still to the upside, though somewhat lower than in the previous policy statement”.
Speaking to the media later, Rajan said: “As of now, we are reasonably set to reach that target but a lot can happen in the world. Oil prices, which are low now, could go up or could become even lower. Every other factor is subject to some uncertainty. The policy will be contingent on data.”
Rajan spoke about other positives on the inflation front, like stable exchange rates and a tempering in rural wage growth but also pointed to risks like the evolution of food prices following deficient monsoons.
He said the target of having inflation at eight per cent by January 2015 was easier than the “harder” task of getting it down to six per cent by January 2016. Rajan refrained from giving any indication on when he would lower rates, except saying any future monetary policy action would be contingent on data. “If data come in and say we are going to miss the six per cent inflation target, we will have to tighten. If data come in and say we will do better than six per cent earlier than January, we will have room to be more accommodative. Currently, we are appropriately positioned.”
Among other measures, the RBI reduced liquidity provided under the export credit refinance facility to 15 per cent of eligible export credit outstanding from 32 per cent, and said it would lower the amount of bonds banks could hold without marking to market (in tranches of 50 basis points between January and September 2015).
Rajan took further steps to buffer the rupee after the US projected a steeper increase in borrowing costs next year. The RBI raised the amount of government bonds that banks hold as ‘high-quality liquid assets’, which could be used to borrow emergency funds when market conditions require liquidity additions, and allowed importers to hedge more of their foreign-currency payments.
The RBI left the statutory liquidity ratio and cash reserve ratio requirements unchanged, but said it would gradually lower the ceiling on the amount of bonds that must be held until maturity to 22 per cent from 24 per cent, by September 19, 2015. The statutory liquidity ratio is the portion of deposits banks must invest in safe assets like government bonds.
The stock market surrendered most of its early gains after the monetary policy announcement, and closed only 33 points higher than its previous close, on selling in interest-sensitive stocks of banking and realty stocks. In highly volatile trade, the 30-share BSE Sensex opened higher and rose to the day’s high of 26,851.33, a jump of 254.22 points from previous close, but shed most of its gains to close at ‘26,630.51. Brokers said the RBI action was largely in line with investors’ expectation and had little impact on buying by participants, but profit-booking at improved levels minimised the gains, spread over a broad front. The central bank also said that while deposits had been growing at a faster pace than credit, a slowdown in credit offtake was due to a variety of reasons, including the corporate sector raising resources from alternative sources like commercial papers. Bankers said lower credit offtake when liquidity was comfortable might lead to trimming of deposit rates to maintain margins, as yield on advances had come down.
“Considering that the system has sufficient liquidity, credit has not picked up, companies have various avenues to raise funds, and investment climate is yet to turn around, banks might reduce their deposit rates going forward. Some large banks have already done so,” said Indian Bank Chairman & Managing Director TM Bhasin, who is also the chairman of Indian Banks’ Association. State Bank of India, which has a comfortable liquidity position, recently reduced its deposit rates for select tenures.