RBI DELIVERS AS EXPECTED, ALL EYES ON FOREIGN BANK WOSs
By Ruma Dubey
The RBI did exactly what everyone had expected – hiked repo rate by 25 bps t0 7.75% and cut MSF rate by 25 bps to 8.75%%. It has kept CRR unchanged at 4%. This was not big surprise. But what did come in and was not expected was the liquidity provided through term repos of 7-day and 14-day tenor from 0.25% of NDTL of the banking system to 0.5% with immediate effect.
The market which was trading flat, heaved a sigh of relief over the end of this suspense and moved up into the green. More than rate hikes, what is extremely relevant is the provision of liquidity to banks - it will give relief in terms of higher liquidity and some reduction is cost of getting the funds.
The policy has a two point agenda – one, normalization of extraordinary measures taken in July to rein in the rupee, which explains the MSF cut. Second, it has sent the right signal regarding inflation.
The best part of the policy is that Mr.Rajan realises that it is affecting financial savings due to the high interest rates and inflation. And he realizes the importance of keeping rate of return attractive. A good part of the savings is being diverted into non-productive assets and that is also a crux of the problem, apart from current account deficit. But what is the menu of assets available to people at this juncture? Gold is no longer attractive and future prospects of the metal also look dim. Maybe this is what will get back people to fixed deposits, depending on where banks keep the rate of return.
There is no doubt that going ahead, inflation will remain the focus. Already inflation is at an elevated level, and good monsoon would mean higher demand, good growth but higher inflation. RBI has stated that while food price pressures may ease with the arrival of the kharif harvest and the usual seasonal moderation, overall WPI inflation is expected to remain higher than current levels through most of the remaining part of the year warranting an appropriate policy response. Retail inflation is likely to remain around or even above 9% in the months ahead, absent policy action.
Rs.75,000 crore worth of bonds are expected to hit the markets in November, there is the festive season demand, elections, notwithstanding the fiscal issues, RBI is expected to continue to maintain a hawkish stance and another rate hike on 18th Dec and later seems inevitable.
The RBI has stated that further policies will be built on five pillars:
1: Clarifying and strengthening the monetary policy framework
2: Strengthening banking structure through new entry, branch expansion, encouraging new varieties of banks, and moving foreign banks into better regulated organisational forms.
3: Broadening and deepening financial markets and increasing their liquidity and resilience so that they can help absorb the risks entailed in financing India’s growth.
4: Expanding access of finance to small and medium enterprises, the unorganised sector, the poor, and remote and underserved areas of the country through measures to foster financial inclusion.
5: Improving the system’s ability to deal with corporate distress and financial institution distress by strengthening real and financial restructuring as well as debt recovery.
More than the credit policy, given the fact that it was on expected lines, bank stocks and the market are more enthused with RBI’s stance on foreign banks to convert into Wholly Owned Subsiidaries (WOSs). RBI has clarified that while it is not mandatory for all foreign banks , they will be incentivized to convert into WOSs by attractiveness of near-national treatment afforded to WOSs. The RBI plans to issue these guidelines by mid-Nov 2013. This has spiked up prices of small banks like Karnataka, Karur Vysya and the whole pack on expectations that they might become prime picks for foreign banks to convert into WOSs. But remember, not every foreign bank is an acquirer and not every small bank is an acquiree - M&A might not be the only way foreign banks might want to become WOSs. Now that is what will keep the banks guessing and stocks going till then….
The challenge though remains – how does India Inc get back onto the growth track?