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Analysts' views on RBI policy review

The Reserve Bank of India left key interest rates on hold on Thursday, as expected, after six increases since March. Lets see what experts have to say:

ET Bureau & Agencies|
Dec 16, 2010, 01.16 PM IST
0Comments
RBI's lifeline to banks, keeps rates unaltered
RBI keeps key rates unchanged, cuts SLR to 24%

MUMBAI: The Reserve Bank of India left key interest rates on hold on Thursday, as expected, after six increases since March. However, the bank cut SLR to 24% with effect from December 18.

Currently the Reverse Repo Rate stands at 5.25%, Repo Rate stands at 6.25% and CRR stands at 6%.

Key Points:
Repo rate, the short-term lending rate, unchanged at 6.25 per cent.

Reverse repo rate, the short-term borrowing rate, unchanged at 5.25 per cent.

Cash reserve ratio , the level of deposits that commercial banks must keep with the central bank, unchanged at 6.0 per cent.

Market Reaction:

At 12:06 p.m. (0636 GMT), the most traded 8.08 per cent, 2022 bond yield eased 2 basis points to 8.04 per cent.

The benchmark 10-year bond, the 7.80 per cent, 2020 was down 4 basis points at 8.04 per cent.

BSE main stock index extended gains to 0.4 per cent from 0.1 per cent earlier

Analysts' view

Sean Callow, Senior Currency Strategist, Westpac Institutional Bank, Sydney:

"Since the RBI so clearly flagged a pause at its November meeting, the data haven't warranted changing their stance. The ongoing decline in y/y wholesale price inflation allows the pause to extend for the time being. But India's activity data have been very resilient and with global inflation pressures not helpful (e.g. >2 year highs on crude oil prices), the RBI is indeed likely to be pausing in its tightening cycle, not ending it.

"Hitting the inflation target is by no means certain. We look for repo rate hikes to resume in Q2 2011, en route to a 7.0 per cent benchmark rate by end-2011."

Sandip Sabharwal, Ceo of portfolio management services at brokerage Prabhudas Lilladher in Mumbai

"The policy was largely in-line with expectations. But, the statements clearly portray a hawkish stance and RBI is definitely not comfortable with inflation."

"We could see RBI hiking rates in January."

Namrata Padhye, Economist, IDBI Gilts, Mumbai:

"Status quo on interest rates and the upside bias expressed on projections for GDP and inflation are in line with expectations. If inflation trajectory points to year-end inflation above 6 per cent, we may see RBI revising its target on inflation upwards at the third-quarter review. Measures on liquidity announced by RBI may aid in bringing liquidity deficit in the system back to the comfort zone."

Paban K Kataky, Director, Exide Industries

"They have not changed the rates. That is a good news for the battery industry. As far as Exide is concerned, our borrowing is very low, our debt equity ratio is very low. So we are not worried. But if you look at the industry as a whole, another hike will not be good news."

Nirav Dalal, MD and Country Head-Fixed Income and Debt Capital Markets, Yes Bank, Mumbai:

"Markets are playing on the OMO action. But I don't like the tone of the statement as he (RBI governor) has expressed his preparedness to act due to high inflation, which could be as early as January, once liquidity comes back to comfortable levels. OMO offsets the SLR cut in the short-term but in the long-term it is bond and swaps negative."

Sean Callow, Senior Currency Strategist, Westpac Institutional Bank, Sydney:

"Since the RBI so clearly flagged a pause at its November meeting, the data haven't warranted changing their stance. The ongoing decline in y/y wholesale price inflation allows the pause to extend for the time being. But India's activity data have been very resilient and with global inflation pressures not helpful (e.g. >2 year highs on crude oil prices), the RBI is indeed likely to be pausing in its tightening cycle, not ending it.

"Hitting the inflation target is by no means certain. We look for repo rate hikes to resume in Q2 2011, en route to a 7.0 per cent benchmark rate by end-2011."

Kumar Rachapudi, Fixed Income Strategist, Barclays Capital, Singapore:

"Knee jerk reaction of the market will likley be a steeper curve. But I think the effect of SLR cut, combined with RBI OMO, will be largely neutral on bonds. Near-term postive, though, because of sentiment. Liquidity will improve, but only by a margin, as RBI OMO will be offset by higher currency in circulation."

Rupa Rege Nitsure, Chief Economist, Bank of Baroda, Mumbai:

"Keeping policy rates unchanged despite growing inflation risks and rising inflationary expectations would compel RBI to tighten more aggresively going ahead. Banks' resource management and planning would play a great role in giving RBI more freedom in maneuvering the policy more flexibly".

Brian Jackson, Senior Emerging Markets Strategist, Royal Bank of Canada, Hong Kong:

"Tone of the statement is definitely on the hawkish side. It appears that tight liquidity conditions in India's money markets have been a major factor in the RBI's decision to stay on hold at this meeting.

"However, the RBI has also stressed that these measures do not represent any shift in the policy stance, which remains focussed on inflation. As a result, once these liquidity pressures ease, the RBI seems likely to keep hiking policy rates -- we forecast another 75 basis points in 2011."

Arvind Parakh, Director, JSL Stainless Ltd:

"With higher inflation, interest costs are going up. So, there will be pressure on corporates as we are in high interest rates scenario. The A-category borrowers will be in a position to borrow overseas. So, they'll be able to keep their costs on lower side. Only smaller borrowers, who do not have resources to borrow overseas, will be impacted. We don't expect rates will rise by more than 50-75 basis points over the next 12 months and that should be manageable."

E. Sudhir Reddy, CMD, IVRCL Infrastructure:

"As long as they (RBI) don't change it (CRR) drastically, there isn't a problem; And we don't mind it being on the higer side since we pass on the effect to the stakeholders.

"In future, it is going to be difficult... the cost of the long gestation projects will definitely go up and that is directly related to interest rates. And interest rates affect not only the capex of these projects but also the support industry."

Jahangir Aziz, Chief Economist, JP Morgan:

No surprises at all. So a non-event and it is good to have at least one non-event.
Part of the problem of the SLR is you have 2 SLRs, where I mean you have the SLR 23% being brought down but you have the HTM at 25% so you would really want banks to say look I am going to give up my HDM comfort and go into my MTM uncertainty for 2% points I really need pretty high interest rates.

I need my call rate over land rate to be much higher through compensate it may for this loss of HDM certainty. It is a huge certainty. I really do not have to worry about mark-to-markets losses at all and I think that sort to gap between, let say, going to RBI overnight at 6.25 and selling into bank market for 675 let say is 50 basis points.

So I think that the 50 basis points may not have been sufficient to entice the banks to use the SLR gap. So that is where the problem is and in India itself Indian bank market has a very strange asymmetry of distribution of liquidity some banks have it others do not. So it is in that every bank is facing massive liquidity crunch.

My guess is that look, some of the banks have already started playing around with the deposit rates. So you will have deposit rates going back, you will therefore see some amount of deposits going into. It is unclear to me that the decline in deposit rates is because households are not depositing, that part is unclear to me. It could very well be the corporates are not depositing and the corporates are using that funds to fund their own working capital needs and that go to the banks.

So unless we have a better sense of whose deposit is not growing I think it is too early to say that we are going to see a reversal of the situation but my overall sense is that yes you will see a reversal of the situation, bank deposit growth will start going back to the usual normal 15%-16% level. I am not so sure about bank credit growth that is where I think I have more misgivings about bank credit growth than about deposit growth.
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