The Reserve Bank of India (RBI) on Thursday offered some comfort to the cash-starved system and left benchmark interest rates unchanged after six increases this year. But market watchers said the pause may prove temporary, going by the central bank’s anti-inflationary stance in its mid-quarter review of monetary policy.
RBI’s measures on Thursday were more focused on addressing the liquidity tightness of Rs 1 lakh crore every day. Hence, the central bank reduced the statutory liquidity ratio (the fraction of deposits banks are mandated to invest in government bonds) to 24 per cent from 25 per cent and announced infusion of Rs 48,000 crore in liquidity — equivalent to a 1 per cent cut in cash reserve ratio — through open market operations (OMOs) in one month.
“The SLR reduction is aimed at supporting credit growth. We hope liquidity tightness will ease with all these steps, and government spending will further provide comfort on liquidity,” said M D Mallya, chairman & managing director of Bank of Baroda.
Banks, which hiked deposit rates to counter the cash crunch and subsequently raised lending rates, may take the central bank’s cue and maintain status quo for the time being, Mallya added.
Most analysts said RBI is likely to increase rates by at least 25 basis points in its January policy review, as inflation pressures are mounting. “RBI’s main concern at this point of time is to address the tight liquidity situation. It will most likely resume rate hikes in January,” said Jay Shankar, chief economist at Religare Capital Markets. The current repo rate is at 6.25 per cent and reverse repo at 5.25 per cent.
“RBI's measures to ease liquidity in the system will help the market. But liquidity will remain in negative territory in January. The central bank will continue to maintain its anti-inflationary stance and it would not be a surprise if RBI raises policy rates by 25-50 basis points by March,” said Mohan Shenoi, treasurer at Kotak Mahindra Bank.
Though the central bank did not hike rates and chose to infuse liquidity, it made it a point to mention that the market should not see this as a reversal of policy. “As the economy expands, it needs primary liquidity, which will have to be provided in a manner consistent with the monetary policy stance. Such provision of liquidity should not be construed as a change in the monetary policy stance, since inflation continues to remain a major concern,” RBI said on Thursday, adding "the risk to our projection of 5.5 per cent inflation by March 2011 is on the upside".
According to dealers, these steps will ensure containment of the liquidity deficit within RBI’s comfort zone: 1 per cent of banks’ net demand and time liabilities, translating into Rs 50,000 crore. In the past two months, three OMOs have been conducted with mixed response from banks.
In addition to the fresh measures, the central bank also maintained additional liquidity support by way of SLR leeway to banks until January 28.
Some felt the SLR reduction would not make much of a difference. “The reduction in SLR is merely a replacement of the earlier temporary, ad-hoc measure with a permanent measure now and, hence, will not induce additional liquidity,” said Madan Sabnavis, chief economist at Care Ratings.
However, the “permanent” nature of this SLR cut will give banks some comfort. Most banks have 5-6 per cent more than the mandatory requirement. “The good part is that it is an enduring measure. The present investment deposit ratio for banks is 30.6 per cent and, hence. the reduction in SLR will affect only those banks that have this ratio at 25 per cent presently,” Sabnavis said.
The markets cheered the measures, with the Bombay Stock Exchange benchmark index, the Sensex, closing 217 points up at 19,865 points. Aggressive buying in IT, banking and select metal stocks led to a sharp late rally.
In Delhi, Finance Minister Pranab Mukherjee said that for the last two years, “the central bank’s steps in tandem with fiscal policy have helped us maintain the level of growth to come up to the higher growth trajectory".
Finance Secretary Ashok Chawla said, “This is a call on the fact that inflation is moderating. The basic problem on Thursday, though temporary, is a problem of liquidity. RBI has responded to that. That is important and very crucial so that credit delivery is not impacted.
