 "RBI cuts rates, eases liquidity")
Reserve Bank of India Governor Raghuram Rajan never ceases to surprise — while Tuesday’s policy repo rate cut by 25 basis points and the stated prospect of another cut later this year if inflation trends stay benign was along expected lines, the twist came from his steps to increase liquidity in the financial system, which addresses the complaint of tight cash conditions that banks have been making as a reason for not cutting their lending rates more earlier.
The combined moves in the bi-annual monetary policy review signalled a new approach by Rajan, who has been talking about his disappointment over poor transmission of policy rate cuts. The RBI had cut its repo rate by 125 basis points last year, but banks, complaining of tight cash conditions, have only lowered their lending rates by around 60 bps.
In his post-policy media interaction, Rajan made his priorities clear: “We have now given them (banks) more liquidity, so transmission should take place,” Rajan said, adding “there will be no uncertainty about liquidity now.”
The same theme was repeated in a teleconference with analysts, where the RBI Governor said the focus should be on how to ensure banks bring down their lending rates, rather than on debating how many rate cuts the central bank should be delivering. “It’s important not to fixate with the 25 basis point or 50 basis point (rate cut)… but to focus on the process by which lower rates are being transmitted into the market,” Rajan said.
Rajan also left open the prospect of more easing. “Of course, we are still open to looking for possible room (for rate cuts), while recognising there are risks on both sides to the inflation process,” he said.
The repo rate, or the rate at which the central bank infuses liquidity, became 6.5 per cent (a more than five-year low) after the latest cut, while the cash reserve ratio (CRR) remained unchanged at 4 per cent, even as daily average requirement of CRR - the slice of customer deposits that banks have to mandatorily park with the RBI - was worked down to 90 per cent from 95 per cent of the total requirement. One basis point is a hundredth of a percentage point.
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Having improved its marksmanship in keeping the overnight call rate fluctuations minimum and centred around the policy repo rate, the central bank narrowed the corridor between the repo and reverse repo rate to 50 basis points from 100 basis points earlier. Major global central banks have very narrow rate corridors, generally 25 basis points, where banks' overnight borrowing rate moves. This ensures effective policy control.
As part of its new liquidity framework, the RBI separated system liquidity into short-term and 'durable', or long term liquidity and said going forward, the central bank would intend to first meet requirements of 'durable liquidity' and then would fine-tune its operations to meet the short term liquidity needs as experience suggested that the provision for short term liquidity did not substitute fully for the required durable liquidity, but the latter could be substituted for short term liquidity.
Under the new regime, the banking system doesn't need to remain in a liquidity deficit mode any longer. The RBI said, "The past rationale for keeping the system in significant average liquidity deficit no longer is as compelling, especially when the policy stance is intended to be accommodative."
The central bank will continue to buy both foreign currency assets (as a central bank buys a foreign exchange, an equivalent amount of rupee liquidity is released in the system) and domestic currency assets (to suck out excess liquidity if that is the requirement).
"If need be, we will do both together, but our first preference would be to buy foreign currency assets if it is adequately available," Rajan said.
The system liquidity will further witness a stress starting September this year as foreign currency deposits (total deposits raised about $27 billion) and its associated swaps entered in September 2013 will come for maturity. The central bank said it was fully prepared to meet the swap obligations and it would monitor the developments closely "to contain any unanticipated market volatility associated with the repayment".
The RBI maintained gross domestic product (GDP) growth projections at 7.6 per cent, but a bad monsoon could chip out some of it, in which case the projection would be lowered. The central bank intends to keep inflation contained at its target 5 per cent by March 2017.
P K Gupta, managing director, State Bank of India, said, "Deposit rates will soften in the near future." As far as the lending rate is concerned, he said, "Banks have already revised benchmark lending rates under the new MCLR regime and further rate action will depend on liquidity, credit off-take and deposit growth."
He, however, clarified that lending rates have indeed fallen by at least 25-50 basis points even before Tuesday's policy rate cut.
Overall, Rajan was happy with the progress made on cleaning bank balance sheets and said the 25 basis point policy rate cut was "sensible, given the uncertainties we are in."
The central bank was checking the abnormal spike in currency with public (which hit 15 per cent at the end of March) and said this could be because of impending state elections.
Defending the RBI's stance on not letting the defaulter list public, Rajan said it would only be right if the wilful defaulters are publicly announced, as defaults can happen despite the best of intentions by a promoter.
"If every time you defaulted and your name is put up in public, you might have some concerns. The act of default happens in business," Rajan said, adding, "We have no problem if the intent is to publish the willful defaulter list."
The Indian rupee lost 0.4 per cent after the local equity index fell more than 500 points on Tuesday. Rupee closed at 66.46 a dollar, down from its previous close of 66.21 a dollar. The benchmark equity index of BSE, Sensex, fell 2.03 per cent, or 516.06 points to close at 24,883.59 points. Bond yields too inched up, with the yield on the 10-year benchmark closing at 7.46 per cent, compared with its previous close of 7.42 per cent.
The combined moves in the bi-annual monetary policy review signalled a new approach by Rajan, who has been talking about his disappointment over poor transmission of policy rate cuts. The RBI had cut its repo rate by 125 basis points last year, but banks, complaining of tight cash conditions, have only lowered their lending rates by around 60 bps.
Read more from our special coverage on "RBI POLICY"
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In his post-policy media interaction, Rajan made his priorities clear: “We have now given them (banks) more liquidity, so transmission should take place,” Rajan said, adding “there will be no uncertainty about liquidity now.”
The same theme was repeated in a teleconference with analysts, where the RBI Governor said the focus should be on how to ensure banks bring down their lending rates, rather than on debating how many rate cuts the central bank should be delivering. “It’s important not to fixate with the 25 basis point or 50 basis point (rate cut)… but to focus on the process by which lower rates are being transmitted into the market,” Rajan said.
Rajan also left open the prospect of more easing. “Of course, we are still open to looking for possible room (for rate cuts), while recognising there are risks on both sides to the inflation process,” he said.
The repo rate, or the rate at which the central bank infuses liquidity, became 6.5 per cent (a more than five-year low) after the latest cut, while the cash reserve ratio (CRR) remained unchanged at 4 per cent, even as daily average requirement of CRR - the slice of customer deposits that banks have to mandatorily park with the RBI - was worked down to 90 per cent from 95 per cent of the total requirement. One basis point is a hundredth of a percentage point.
Having improved its marksmanship in keeping the overnight call rate fluctuations minimum and centred around the policy repo rate, the central bank narrowed the corridor between the repo and reverse repo rate to 50 basis points from 100 basis points earlier. Major global central banks have very narrow rate corridors, generally 25 basis points, where banks' overnight borrowing rate moves. This ensures effective policy control.
As part of its new liquidity framework, the RBI separated system liquidity into short-term and 'durable', or long term liquidity and said going forward, the central bank would intend to first meet requirements of 'durable liquidity' and then would fine-tune its operations to meet the short term liquidity needs as experience suggested that the provision for short term liquidity did not substitute fully for the required durable liquidity, but the latter could be substituted for short term liquidity.
ALSO READ: Liquidity management change to ease pressure
Under the new regime, the banking system doesn't need to remain in a liquidity deficit mode any longer. The RBI said, "The past rationale for keeping the system in significant average liquidity deficit no longer is as compelling, especially when the policy stance is intended to be accommodative."
The central bank will continue to buy both foreign currency assets (as a central bank buys a foreign exchange, an equivalent amount of rupee liquidity is released in the system) and domestic currency assets (to suck out excess liquidity if that is the requirement).
"If need be, we will do both together, but our first preference would be to buy foreign currency assets if it is adequately available," Rajan said.
The system liquidity will further witness a stress starting September this year as foreign currency deposits (total deposits raised about $27 billion) and its associated swaps entered in September 2013 will come for maturity. The central bank said it was fully prepared to meet the swap obligations and it would monitor the developments closely "to contain any unanticipated market volatility associated with the repayment".
The RBI maintained gross domestic product (GDP) growth projections at 7.6 per cent, but a bad monsoon could chip out some of it, in which case the projection would be lowered. The central bank intends to keep inflation contained at its target 5 per cent by March 2017.
P K Gupta, managing director, State Bank of India, said, "Deposit rates will soften in the near future." As far as the lending rate is concerned, he said, "Banks have already revised benchmark lending rates under the new MCLR regime and further rate action will depend on liquidity, credit off-take and deposit growth."
He, however, clarified that lending rates have indeed fallen by at least 25-50 basis points even before Tuesday's policy rate cut.
Overall, Rajan was happy with the progress made on cleaning bank balance sheets and said the 25 basis point policy rate cut was "sensible, given the uncertainties we are in."
The central bank was checking the abnormal spike in currency with public (which hit 15 per cent at the end of March) and said this could be because of impending state elections.
Defending the RBI's stance on not letting the defaulter list public, Rajan said it would only be right if the wilful defaulters are publicly announced, as defaults can happen despite the best of intentions by a promoter.
"If every time you defaulted and your name is put up in public, you might have some concerns. The act of default happens in business," Rajan said, adding, "We have no problem if the intent is to publish the willful defaulter list."
The Indian rupee lost 0.4 per cent after the local equity index fell more than 500 points on Tuesday. Rupee closed at 66.46 a dollar, down from its previous close of 66.21 a dollar. The benchmark equity index of BSE, Sensex, fell 2.03 per cent, or 516.06 points to close at 24,883.59 points. Bond yields too inched up, with the yield on the 10-year benchmark closing at 7.46 per cent, compared with its previous close of 7.42 per cent.
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RBI ADDRESSES ECONOMY’S CHALLENGES LIQUIDITY Problem: RBI’s average daily liquidity infusion increased from Rs 1.35 lakh cr in Jan to Rs 1.94 lakh cr in Mar Solution: Overhauling of liquidity framework; will provide ‘durable’ liquidity infusion TRANSMISSION Problem: Despite the 125 bp policy rate cut in the past, banks had passed on only 60-75 bps Solution: New liquidity framework coupled with marginal cost-based lending rate will push banks to cut rates FCNR-B DEPOSITS Problem: About $34 billion is maturing in Sep-Nov 2016; can cause liquidity problem Solution: RBI has fully covered the swaps through forward forex purchases MONEY MARKET RATES Problem: Variation in overnight call money rates Solution: Shrinking of liquidity adjustment facility corridor to 50 bps from 100 bps GOVT CASH BALANCES Problem: Govt surplus cash balance with RBI over Rs 1.5 lakh cr Solution: Consulting government to moderate the build-up |
