RBI MAINTAINS STATUS QUO
By Ruma Dubey
The RBI Policy of today was exactly on expected lines – there was no change in the interest rates. The market and the bankers were fearful that there could be a hike in the CRR to suck out the excess liquidity. Thankfully that did not happen – there was no CRR action. There has been some tinkering done but overall, it was a very staid policy, with no fireworks or even a spark. So much so that within 10 minutes of the policy announcement, the markets had moved on and it was looking beyond the policy event, even before the RBI Governor addressed the Press!
A quick look at the policy highlights:
- Policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.25 per cent
- Reverse repo rate adjusted to 6% from 5.75%
- Bank rate revised to 6.5% from 6.75%
- MSF rate revised to 6.5% from 6.75%
- These decisions were taken to maintain the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
- Headline CPI inflation is set to undershoot the target of 5% for Q4FY17 in view of the sub-4% readings for January and Feb.
- For FY18, inflation is projected to average 4.5% in the first half of the year and 5% in the second half.
- Risk ahead – uncertainty surrounding the outcome of SW monsoon in view of the rising probability of an El Nino event and its implications on the food inflation.
- GVA growth is projected to strengthen to 7.4 per cent in 2017-18 from 6.7 per cent in 2016-17, with risks evenly balanced.
- Impact of demonetization on the wane and should fade away by the Q4FY17.
- Banks can also invest in REITs like mutual funds – a positive move to harness excess money
- The next meeting of the MPC is scheduled on June 5 and 6, 2017.
There was wide spread expectation RBI would announce something on the bank NPAs but nothing came forth on this except that it would RBI would announce when it is ready.
The only good part – the deputy governor slammed the farm loan waiver saying that it threatens the credit culture, endangers moral hazards and takes money away from tax payers.
SO all this build up since yesterday is finally over and now it is looking ahead – maybe the results for Q4 and FY17 numbers as there is no US Fed meet scheduled for this month. Result season will start with Infosys on 13th April. It will be looked upon with great anticipation as to how IT companies pan out….
The Govt is indeed trying to put in place a growth package and what is needed more than liquidity, right now, is that all regulatory impediments are overcome and projects start getting off the ground. There is excessive focus on interest rates. The economy will take its own course and softening of interest rate is a given but the Govt needs to work overtime to push growth. There is consumption in the economy which is as such income based. So liquidity is really not the issue. And neither will a rate cut suddenly push up growth. More than demand, the economy is struggling due to supply issues, problems more of implementation. Only when this gets resolved will liquidity will come into focus and only then will rate cuts matter.
| A QUICK LESSON Repo Rate– Known as benchmark interest rate, it is the rate at which the RBI lends money to the banks for a short term. When the repo rate increases, borrowing from RBI becomes more expensive. Reverse Repo rate - short term borrowing rate at which RBI borrows money from banks and a tool used to absorb excess liquidity in the banking system. When rate is increased, banks will higher rate from RBI and will prefer that rather than lending to retail and corporate. CRR – Cash Reserve Ratio is the ratio which banks need to hold as cash of their deposits. CRR rate indicates part of the total deposits to be held as cash. SLR or Statutory Liquidity Ratio – the minimum proportion of banks Net Demand (accounts from which you can withdraw money any time, Savings and Current) and Time Liabilities (no immediate withdrawal allowed, like FDs) to be maintained as liquid assets in the form of cash, gold and un-encumbered approved securities. The SLR rate can be hiked by RBI up to a maximum of 40%. Call Rate - this is the interest rate paid by the banks for lending and borrowing funds with maturity period ranging from one day to 14 days. MSF or Marginal Standing Facility – it is higher than Repo rate and this is a special facility which banks can use to borrow from RBI approved government securities in an emergency situations. Bank Rate – Long term rate at which banks and financial institutions borrow from RBI. It is usually the same as the MSF rate. |
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