By Ruma Dubey

Even before the Credit Policy was announced, the Finance Minister had “hinted” that we will see a reversal of policy stance and RBI is ‘likely’ to cut rates today.  More than a hint, it looked more or less that it was decided and the RBI Governor, pushed to the corner, really had no say.  Even before the policy was announced, Bond yields had dropped sharply, assuming that a rate cut is coming, following the FM’s ‘hint’. Banking stocks also recouped its losses. The BSE was up 53 points.  The market was rallying only on whether the rate cut was 25 bps or would it be 50 bps.  

And the policy was more than an endorsement of the FM’s hint.  In an extremely surprising move, RBI cut repo rates by 50 bps to 8%, leaving the CRR unchanged at 4.75%.  Marginal Standing Facility (MSF)is a facility under which banks can borrow funds from RBI at 8.25%, which is 1% above the liquidity adjustment facility-repo rate against pledging government securities. MSF rate is usually 100 bps above the repo rate. This is a facility wherein banks can borrow funds through MSF when there is a considerable shortfall of liquidity.  This MSF, RBI has reduced by 50 bps and the borrowing cap has been raised to 2% from the earlier 1%.

This unexpected 50 bps could have been because 25 bps rate cut was broadly expected and RBI probably wanted to urge the banks, with a 50 bps cut, to pass on the reduced rates to the customers. The message also sent out is that core inflation is expected to pick up and fuel price will go up any time now; thus there is limited window to cut rates ahead as inflation will remain sticky. 

This repo rate cut and MSF easing is expected to resolve liquidity issues for the banks to a large extent and banks are sure to pass on this easing to the customers by reducing rates.

Immediately the market zoomed up by 173 points and then went down to 130 levels, wondering about RBI’s statement that there is now limited space for more easing.  The RBI Governor said, "It must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates”. There is clearly limited room for maneuverability going forward, so one should not expect too much of rate cut in the coming days. This does not mean that this is the end of the rate cuts; it only means that for now, in the immediate future, we might not see a rate cut; this 50 bps rate cut can thus said to be front loaded!

Subbarao also said, “"From the perspective of vulnerabilities emerging from the fiscal and current account deficits, it is imperative for macroeconomic stability that administered prices of petroleum products are increased to reflect their true costs of production." This clearly means that in the coming days, we can expect a fuel price hike. This is the ‘hint” which the RBI Governor has given to the FM - you scratch my back, I will scratch yours.

This rate cut is expected to give impetus to growth and boost sentiments. For now, the market is happy but tomorrow is another day and soon another cue will be needed.

HIGHLIGHTS OF THE RBI POLICY:

·      Repo rate under the liquidity adjustment facility (LAF) by 50 basis points from 8.5% to 8.0% with immediate effect.

·    Reverse repo rate under the LAF, determined with a spread of 100 bps below the repo rate, stands adjusted to 7% with immediate effect.

·      Raise the borrowing limit of scheduled commercial banks under the marginal standing facility (MSF) from 1% to 2%

·      Banks can continue to access the MSF even if they have excess statutory liquidity ratio (SLR) holdings.

·      MSF rate stands adjusted to 9%

·      Bank Rate stands adjusted to 9% with immediate effect

·      Cash reserve ratio (CRR) of scheduled banks has been retained at 4.75%

·      Not to permit banks to levy foreclosure charges/pre-payment penalties on home loans on a floating interest rate basis.

·      Banks are asked to initiate steps to allot UCIC number to all their customers while entering into any new relationships in the case of all individual customers to begin with. Similarly, existing individual customers may also be allotted unique customer identification code by end-April 2013.

·      RBI has advised banks to offer a ‘basic savings bank deposit account’ with certain minimum common facilities and without the requirement of minimum balance to all their customers.

·      To issue the final guidelines on the implementation of Basel III capital regulations by end-April 2012.

·      Banks should reduce their regulatory exposure ceiling in a single NBFC, having gold loans to the extent of 50% or more of its total financial assets, from the existing 10% to 7.5% of bank’s capital funds. However, exposure ceiling may go up by 5%, i.e., up to 12.5% of bank’s capital funds if the additional exposure is on account of funds on-lent by NBFCs to the infrastructure sector.

·      GDP for FY13 expected at 7.3% ; Has projected WPI at 6.5% for FY13, M3 growth is expected at 15%; Credit growth at 17% and bank deposit growth at 16%.

·      The next mid-quarter review of Monetary Policy for 2012-13 will be announced on Monday, June 18, 2012 and the First Quarter Review of Monetary Policy for 2012-13 is scheduled on Tuesday, July 31, 2012.