The Reserve Bank of India (RBI) in the bi-monthly monetary policy review on Tuesday kept the repo rate unchanged at 8%. The Cash Reserve Ratio (CRR) was also unchanged at 4% of net demand and time liabilities (NDTL).
However, the Statutory Liquidity Ratio (SLR) was reduced by 50 basis points to 22.5% of banks NDTL with effect from the fortnight beginning June 14. The central bank also reduced the liquidity provided under the export credit refinance (ECR) facility from 50% of eligible export credit outstanding to 32% with immediate effect. The SLR cut will be effective June 14.
RBI also introduced a special term repo facility of 0.25% of NDTL to compensate fully for the reduction in access to liquidity under the ECR. The policy reflects a balanced and pragmatic view of current economic conditions as well as the improved prospects for the economy following the decisive verdict in the recent general elections, Chanda Kochhar, MD & CEO, ICICI Bank, said.
The reduction in SLR is a welcome signal of the commitment to reduce pre-emption of resources over time and create more room for banks to finance growth. The measures with respect to outward remittances and currency markets reflect both, the significantly improved confidence in the country’s external position which allows reversal of the extraordinary measures taken last year, as well as the focus on developing deeper onshore markets, Kochhar added.
Lalitkumar Jain, CMD, Kumar Urban Development Ltd (KUL), said, “The Government and RBI may require developing a special approach towards housing. A long term status quo on interest rates will not help home seekers. To provide shelter and to move the economy we have to work towards home loan rate reduction. Also, RBI has to consult CREDAI and develop a practical policy on lending to Housing Projects."
According to Pankaj Bansal, Director, M3M India, the recent decision on keeping the rates unchanged was widely anticipated by developer community, as we were aware that the economy has gone past recession and is on consolidation mode. Any change in rates is not feasible as we have reached the zenith of high rates of interest prevailing in the market.”
Bansal further said, “All eyes are now on first budget by Modi Government where we expect some favourable reforms for real estate sector like infrastructure statue, widening of FDI norms etc. If the Union Government comes out with economic reforms, RBI would relax key rates to further boost the sentiments in market in the upcoming credit policy.”
Rahul Goswami, CIO-Fixed Income, ICICI Prudential AMC, said, “As the economy recovers, demand for investment and credit will pick up. To meet this demand, RBI has reduced the SLR requirement for the banking system to expand credit to the non-government sector.”
“Bond yields are likely to remain range-bound with a downward bias, in the medium term. Fiscal consolidation, continued improvement in current account and moderating CPI could provide RBI, the space for monetary easing and lower interest rates,” he added.
The cut in the SLR by 50 basis points suggests that the RBI is signalling banks to stay ready to lend, in the event of a revival in the economy and a consequent increase in credit demand, Vidya Bala. Head-Mutual Fund Research, FundsIndia.com, elaborated.
Bala further said, “The bond market may be ripe for a rally over an 18-month plus time frame if the inflation does not stray away from the RBI’s comfort zone. While this may mean taking positions in long-dated funds, retail investors should be strictly guided by their time frame of investment, when it comes to investment in debt funds to avoid burning their fingers as was the case in mid-2013.”
Shailendra Bhandari, MD & CEO, ING Vysya Bank, pointed out, “We see stability and steady policy stance even as the overall approach of the policy is neutral to dovish. Both SLR and Export Credit Refinance reduction are two significant measures that help ease liquidity in the near term. Also raising the ceiling for foreign currency remittances implies better macroeconomic indicators.”
In the coming months, a strong base effect of high inflation during June-November 2013 could soften CPI inflation. The big worry is the enhanced possibility of a recurrence in the El Nino this year, which could lead to weaker-than-normal monsoon, cranking up food inflation. Given the uncertainties, the RBI’s decision to hold interest rates steady is appropriate, CRISIL said.
CARE Ratings said, given the uncertainty surrounding the monsoon and a likelihood of the El Nino, we expect RBI to maintain repo rate at 8% and continue with its stance until there is clarity over the nature of monsoon.
A reversal in the stance to promote growth can be expected in Q4- FY15 provided inflation remains within the comfort corridor. Further conjectures about the economy will follow upon the announcement of the Union Budget for FY15 as it will establish the Government’s borrowing plan for the ongoing fiscal.
Today's bi-monthly policy review is the first after Prime Minister Narendra Modi assumed office on May 26.
The RBI has increased the key repo rate three times since Rajan took over as Governor in September. The third bi-monthly monetary policy statement is scheduled on Tuesday, August 5, 2014.