RBI surprises with SLR reduction

India Infoline News Service | Mumbai |

With banking system deposits growing faster than advances, further decline in bulk funding rates and likely gradual moderation in core inflation, we expect commercial banks to cut deposit rates in the next 3-6 months.

Surprising the market once again, RBI Governor Raghuram Rajan cut the SLR requirements for banks by 50bps to 22.5% of NDTL. The consequent liquidity release will not only provide commercial banks headroom for lending but also improve their profitability marginally. While the repo rate and CRR were left unchanged at 8% and 4% respectively, the policy commentary on inflation seemed less perturbed as compared to April. According to the central bank, the upside risks to its forecast of 8% CPI by January 2015 have been balanced by the possibility of stronger Government action on food supply, better fiscal consolidation and recent rupee appreciation.

Liquidity conditions could ease further
RBI also remains committed towards maintaining adequate liquidity in the banking system. So while reducing the liquidity provided under the export credit refinance (ECR) facility from 50% to 32% of eligible export credit outstanding, the central bank introduced a special term repo facility of 0.25% of NDTL of the banking system which would fully compensate the ECR reduction. It will also continue to provide liquidity under 7-day and 14-day term repos of up to 0.75% of NDTL. Liquidity conditions improved in April and May which was manifested in 25-50bps decline in short-term rates. The 10-yr bond yield has also cooled-off to 8.7% after touching 9.1% in early April. With banking system deposits growing faster than advances, further decline in bulk funding rates and likely gradual moderation in core inflation, we expect commercial banks to cut deposit rates in the next 3-6 months.  

‘Monetary Pause’ to continue for a while
In our view, while a further repo hike is a dying possibility, a rate reduction in the near term also looks implausible as RBI wants the disinflationary effects of rate increases undertaken during September 2013-January 2014 to continue. If disinflation is faster-than-anticipated, than it will provide headroom for policy easing. Currently, we retain our view of 50-75bps rate easing in H2 FY15 and would closely watch how the host of factors affecting inflation play out in the next three months.

Source: IIFL Research

Also Read:

BREAKING NEWS: RBI cuts SLR by 50 bps

RBI on an extended pause mode

Foreigners can participate in domestic fx derivatives market: RBI

What is RBI Policy Stance and Rationale?

RBI cuts SLR…but what is SLR?

RBI will continue to actively manage liquidity

CPI inflation still elevated: RBI

Highlights: RBI slashes SLR...keeps policy rates unchanged

Conducive environment for policy action likely: RBI

Global activity evolving at different speeds: RBI

Prospects of exports should improve further: RBI

RBI committed to keep economy on disinflationary course

RBI: What are the Monetary and Liquidity Measures?

What is CRR, repo and reverse repo rate?
 

Advertisements

  • Save upto Rs.2.67 lakh with Pradhan Mantri Awas Yojana ...Know more
  • Now Save Rs.3150 on your Demat Account ...Click here
  • Now get IIFL Personal Loan in just 8* hours...APPLY NOW!
  • Get the most detailed result analysis on the web - Real Fast!
  • Actionable & Award-Winning Research on 500 Listed Indian Companies.