Comments
The market did not expect any cut in the repo rate and CRR in the first quarter review of monetary policy by the RBI, because the macro-economic situation since the last mid-quarter review has not changed at all.
Both the WPI and CPI continue to remain at elevated levels. No steps towards fiscal consolidation emanated from the side of the Government. On the contrary, Brent crude oil prices have risen to $107 a barrel and monsoon continues to be below average so far. As expected, the RBI kept both these rates unchanged.
However, the market was surprised by an unexpected reduction of SLR by the RBI from 24 per cent to 23 per cent of net demand and time liabilities. This move was apparently to bridge the gap between YOY credit growth of 17.7 per cent and YOY deposit growth of 14.7 per cent of the banking system.
RISK-AVERSE
The end objective of this move appears to be two-fold: one, to prevent to the extent possible the crowding out of private borrowing by the large Government borrowing, and second to achieve the medium term goal of reducing the combined ratio of CRR and SLR to a more acceptable level of 20 per cent.
After the above reduction, the combined ratio now stands at 27.75 per cent, which is still very high. It remains to be seen whether banks will indeed divert the Rs 65,000 crore released by reduction of SLR into loans or corporate bonds. My own assessment is that banks, owing to rising NPA numbers, are currently credit-averse. In their current mood they may continue to invest in Government securities which are risk-free with a decent return over their cost of funds.
The bond yields initially spiked up on the news of SLR reduction, because it meant reduction in demand for Government securities by Rs 65,000 crore, while there is a significant risk of supply going up on account of fiscal slippage.
However, the yields moderated downwards as the trading session progressed because the market figured out that OMOs could potentially bridge the demand and supply gap, and that credit-averse banks may not divert funds from Government securities to loans.
ONUS ON GOVT
The tone of the RBI policy review continues to lean towards inflation control rather than stimulating growth.
By reducing growth expectations to 6.5 per cent and increasing inflation expectation to 7 per cent, while keeping the policy rates unchanged, the RBI has sent a clear message that the growth-inflation dilemma can only be resolved through fiscal policy, and not through monetary policy. The need of the hour is for the Government to reduce subsidies and create the necessary fiscal space to provide investment stimulus to the economy.
(The author is President, Group Treasury and Global Markets, Kotak Mahindra Bank. Views are personal.)
Comments
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.