SANDY AND SUBBARAO - BOTH DO A LANDFALL AND CAUSE MAYHEM

By Ruma Dubey

Chances of an interest rate cut in 2012 looks miniscule. We might as well write off that expectation for now and concentrate on the other measures which RBI is taking to ensure that growth does not come to a grinding halt while keeping its hawkish stance on inflation very much intact.

The 25 bps CRR cut is an indication that some little improvement in liquidity would do good and RBI is trying to balance inflation and growth.  This cut, to some extent, is a sign of easing. CRR lowering is to ensure liquidity does not tighten in the system and as the RBI said, “reduction in the CRR is intended to pre-empt a prospective tightening of liquidity conditions, thereby keeping liquidity comfortable to support growth. The cut is preemptive prospective liquidity strain.”

This is a very prudent step taken by RBI. It has been fighting inflation for a long time and to give it up now, would have nullified the entire process. Long term, from the country perspective, this was the best move possible. Naturally, the markets are disappointed as it had already factored in a 25 bps CRR cut and after the slew of reforms and yesterday’s Fiscal Consolidation Plan, was expecting reciprocal action from RBI with a rate cut. Well, that did not happen and for now, the markets are sulking.

But if one looks at the bigger picture, it is once again very bold of the Governor to not bend down to pressures and is keeping his fight against inflation intact. It is good to know that RBI has not struck any compromise with the Govt and is sticking to its guns.  It would be great if the market could concentrate on the fact that the man at the helm at RBI has kept his integrity intact. Yes, India is standing apart by keeping its priority first on inflation and then on growth unlike the rest of the world and that is something which shows gumption and the ability to not bend down to market pressures.

The banking sector is currently painted a deep hue of red on the BSE. The market is perturbed with the RBI raising the provisions for restructured standard accounts from 2% to 2.75%. RBI has also stated that banks which do not comply with rules related to bad loans will face penalties from the regulator. This means banks bottomlines could take a big hit, given the fact that many of their ‘very big’ borrowers have submitted proposals for loan recast. This means that banks which as such were reeling under higher NPAs could face more heat. It could be a clear shave off of 2-2.5% from PBT of PSU banks and around 0.5% from PBT of private sector banks.

For the markets, PSU banks as of now might remain a big no-no and for the overall markets, the trigger could now happen only when all the rhetoric’s of the Govt finally gets translated into action. We have moved ahead of the announcement phase and unless all that was announced gets implemented, the markets might continue to remain lackluster.

Highlights of the Credit Policy:

• Interest rates remain unchanged; repo rate remains at 8% and reverse at  7%
• CRR cut by 25 bps from 4% to 4.25%, effective the fortnight beginning November 3, 2012.
• Marginal Standing Facility (MSF) rate, stands at 9%
• Bank Rate stands at 9%
• FY13 inflation projection raised to 7.5% from 7% as indicated in July
• FY13 GDP projection cut to 5.8% from 6.8%
• Inflation may rise in coming months and could ease only by Jan- March
• Provision on standard recast loan raised to 2.75% from 2%
• Banks not allowed to fund purchase of gold
• Change the settlement cycle of the primary auction in Treasury Bills (T-Bills) from T+2 to T+1.
• Bank loans to Housing Finance Companies (HFCs) for on-lending for housing up to Rs.10 lakh per borrower, may be included under the priority sector, provided the interest rate charged to the ultimate borrower by the HFC does not exceed 2% above the lowest interest rate of the lending bank for housing loans.
• To issue draft guidelines on composition of capital disclosure requirements by end-December 2012.
• Banks to share information on credit exposure among themselves. Banks failing to adhere to this directive would be viewed seriously by the RBI and banks would be liable to action, including imposition of penalty.
• Banks to put in place a proper mechanism to rigorously evaluate the risks arising out of unhedged foreign currency exposures of corporates, and price them in the credit risk premium.
• Next Mid-Quarter Review of Monetary Policy for 2012-13 will be announced on Tuesday, December 18, 2012 and Third Quarter Review of Monetary Policy for 2012-13 is scheduled for Tuesday, January 29, 2013.