Source: myiris (link)
India's Central Bank, the Reserve Bank of India (RBI) in its third quarter monetary policy review on Tuesday has reduced cash reserve ratio (CRR) rate by 50 bps to 5.5% in order to infuse more liquidity into the system. It has retained the short-term lending and borrowing rates broadly inline with the expectations of the market participants. As a result of the reduction in the CRR, around ` 320 billion of primary liquidity will be injected into the banking system. With this, the repo and reverse rates stand unchanged at 8.50% and 7.50%. Meanwhile, statutory liquidity rate was retained at 24%.
At the close, BSE Sensex added 244.04 points or 1.46% at 16,995.77 and NSE Nifty went up by 81.10 points or 1.61% at 5,127.35 today.
VIEWS FROM EXPERTS ON CRR CUTS:
Seshagiri Rao, Managing Director & Group Chief Financial Officer, JSW Steel:
When there is a tight liquidity conditions forcing the banks to borrow ` 1500 billion under LAF window, the cut in CRR by 0.5% is very timely to provide liquidity in the Banking system. It is also very much essential to cut policy rates to boost sentiment and revive the investment cycle.
Pradeep Jain, Chairman, Parsvnath Developers:
RBI, in its Credit Policy Review has attempted to do a delicate balancing act between the need for growth and urgency of containing price line. In the end it has acted with caution by keeping all rates unchanged and just by reducing Cash Reserve Ratio (CRR) by 50 bps. The tokenism has seen release of ` 320 billion for the banking sector to lend. After the negative impact created by thirteen continuous rate hikes, this will prove insufficient to boost the growth.
That the economic growth has been reined in is clear enough with RBI too reducing the target growth rate. But more critical for the productive sector is consumption of funds by the government sector leaving private investment short of liquidity. In last one and half year the investments have drastically shifted towards public sector which has impacted the private players very badly. Hopefully the Union Budget will correct the aberration and help RBI ease monetary policy. Only then growth will receive the relevant support.
For real estate sector in particular, this will serve as a signal that interest rates will now ease. Buyers may opt for floating rate loans at this juncture since the signal is clear. Also the rising input cost will not leave any space for reduction of price. Buyers are expected to take the signal. We only hope that the forthcoming Union Budget will leave RBI room to address the issue of easing monetary policy aggressively.
Harsh Pati Singhania, Ex President, FICCI & Managing Director, JK Paper:
The announcement to reduce CRR is a welcome move. Through this the RBI has attempted to address the structural pressures on liquidity and thereby avoid disruption to non food credit delivery. It gives further signal that once conditions become favourable RBI will begin to reduce these policy rates. We hope that the interest rate sentiment will start coming down. It is hoped that RBI will not miss any opportunity to restore the growth momentum in its anxiety to anchor inflationary expectations. Business would like RBI to reverse its tight monetary policy at the earliest. This we feel is essential because it will take more efforts and longer time to restore growth if the slowdown goes beyond a point.
Manoj Paliwal, Chief Financial Officer, Omkar Realtors & Developers:
0.50% reduction in CRR announced by RBI is a step in right direction although too less and a bit late. We do not foresee any immediate impact on the interest rate which is disappointing as Real Estate is top notch priority for the common man. Therefore, liquidity for real estate companies will improve only after other sectors have got sufficient funding.
Aneesh Srivastava, Chief Investment Officer (CIO), IDBI Federal:
RBI has changed its stance from tight monetary policy to moderation in rates and has given enough indication of softer bias in months to come. This has come on the back of tight liquidity conditions faced by banks despite OMO’s conducted by RBI to infuse liquidity. Slowing global as well as domestic growth is one of the other reasons for change in bias. We expect that inflation & growth challenges to keep haunting economy till structural steps to improve supply side constrains are taken as well as more prudent fiscal policy is adopted.
Kavi Arora, Chief Executive Officer, Religare Finvest:
RBI in its policy review announced a 50 bps CRR cut, while leaving the repo and reverse repo rates unchanged. We feel that it is an unexpected but very positive and forward looking move, specifically for the banking and financial services industry. This move will infuse liquidity of around 320 billion in the system which will increase credit off take and fuel higher growth. Since liquidity and interest rates are closely inter-linked, the move from regulator should lead to interest rates cut in near future.
Citi India:
Given that the growth-inflation balance has shifted to growth, we maintain our view of a minimum 100bps cut in the repo rate in 2012. However, it’s worth noting that the RBI has said the timing and quantum would be contingent on (1) policy measures to induce investments and (2) steps towards fiscal consolidation. On the liquidity front, given the tight liquidity conditions (RBI daily LAF injection has averaged 1200bn in the recent past), and a fiscal slippage of 100bps, we expect to see continued recourse to Open Market Operations and further CRR cuts in the coming months. (Fiscal YTD, the RBI has conducted OMO’s to the tune of Rs720 billion).
D R Dogra, Managing Director & Chief Executive Officer, CARE Ratings:
The RBI has adopted a two prong strategy to tackle the inflation-growth trade-off on the one hand and the management of fiscal balances on the other. The maintaining of repo rate at 8.50% was on expected lines - the cue being a declining inflation trend. Simultaneously, though high core inflation remains a concern and cannot be sidelined. On the other hand, the CRR cut by 50 bps is aimed at boosting growth through liquidity injection. The proposal to deregulate diesel is a challenge politically, socially and economically. However, both initiatives recognize the need for fiscal consolidation in the current and following years.
Arun Singh, Senior Economist, Dun & Bradstreet India:
In view of the rising downside risks to growth and upside risks to inflation, RBI kept the repo rate unchanged as widely anticipated. The downward revision to growth for FY12 from 7.6% to 7.0% by the RBI highlights the concerns to growth. The RBI is likely to continue to hold the repo rate until Apr-12 as upside risks to inflation still persists. While the cut in the CRR would ease the flow of credit to the productive sectors, it might add to the inflationary pressures as the growth in money supply still remains in line with RBI’s indicative trajectory.
Sandesh Kirkire, Chief Executive Officer, Kotak Mutual Fund:
The RBI measure to slash CRR by 50 bps is a welcome step and would provide liquidity infusion of around ` 320 billion into the system. This move strongly highlights the changing RBI stance from inflation-management to growth-orientation. With the inflation expected to move in predictable trajectory, the change in monetary stance is evident.
Sonal Varma, Analyst, Nomura:
In our view, a repo rate cut in March looks unlikely. The RBI stated that rate cuts will be conditional on a sustainable moderation in inflation and strong signs of fiscal consolidation. With the Union budget due around mid-March and core inflation likely to ease substantially only in March (data out on 13 April), we believe that the first repo rate cut is likely on 17 April. A cash reserve ratio cut again in March cannot be ruled out and depends on the extent of open market operations (OMO’s) conducted until then and the RBI’s FX intervention policy. The liquidity deficit is currently running at 2.5x the RBI’s stated comfort zone (+/- ` 600 billion). With today’s CRR cut, the deficit should ease, but will likely remain above the RBI’s comfort zone owing to continued currency leakage in the next few months. This suggests that, despite the CRR cut, the RBI will need to continue to conduct OMO’s to further reduce the liquidity deficit. We continue to expect another 50bp cut in the CRR by Q2 2012 and a 50bp reduction in the repo rate in Q2.
Yadnesh Chavan, Fund Manager, Fixed Income, Mirae Asset Global Investments:
India’s Central Bank cut the amount of deposits lenders need to set aside as reserves for the first time since 2009 signalling a moderation in its hawkish policy stance. The Reserve bank of India reduced the Cash Reserve Ratio to 5.5% from 6%. The move would add around 320 billion rupees into commercial banks and help manage the current liquidity deficit of over 1.2 trillion rupees. The reserve bank will now wait for data points on the current year fiscal slippage and level consumption spending in FY13 to gauge Government borrowing requirement in FY13 and thereby draft its more clear perspective on the liquidity and inflation management front. In terms of rate cuts it may not consider the same unless strong signs of fiscal consolidation emerge. The coming months will witness liquidity pressure and the central bank is expected to continue with Open Market Operations (OMOs) to infuse more liquidity into the system.
Kislay Kanth, Senior Director, Research, MAPE Securities:
The RBI step should certainly provide optimism to banks (as their margin declines reduce following a CRR cut) and corporate sector (which can see an emphatic signal for promoting the investments process). The markets have responded favourably to the cuts and would be poised to cross the near term major technical levels and help sustain the recent run up in the equity markets. The Indian market is among the better performing ones globally, since 18-19 Dec 2011 in USD terms, due to Rupee appreciation and market appreciation.
The RBI step should now be backed strongly by the Government of India in taking some bolder steps on the reforms front, as well as expenditure cuts to rein in fiscal deficit, since lack of reforms and bloating fiscal deficit would surely take the wind out of the rebound that the markets have seen. FDI policies, GST and DTC implementations, Power sector reforms, Coal and energy related reforms all become very important in setting the direction of the markets in the next 3-6 months and we expect progress on all these fronts. The budget for FY2013 will also become crucial since the FY2013 growth expectations, on which markets have become very pessimistic, can again look up over the next 2-3 months.
Sunil Mehta, Country Head & Chief Executive Officer, AIG India:
Governor Subbarao has once again taken appropriate action in reducing CRR by 50 bps reflecting a calibrated attempt to address structural pressures on liquidity. The Governor has adroitly dealt with key challenges of slowing growth and uncertain global environment. The infusion of liquidity will provide the necessary impetus at this critical juncture and give the much needed confidence to boost private investment. The onus is now on the Government to take appropriate action to instil fiscal discipline and take strong measures to address supply constraints. It must be recognized that there has to be strong cohesive and coordinated action between the Government and the Central Bank particularly in an environment where the country faces vulnerability on account of potential imported inflation. The timely shift in RBI’s policy stance should hopefully provide some reassurance to the markets. The CRR reduction is a strong reinforcement of RBI’s commitment to future easing of policy rates if the inflation trajectory is in line with the Central Bank’s projections.
