Rajan Goes For Big-Bang Cut

Repo rate at four-&-a-half-yr low of 6.75% after a cut of 50 bps

 

• Repo rate at four-&-a-half-yr low of 6.75% after a cut of 50 bps;
• SBI cuts base rate by 40 bps to 9.3%; BoI, Andhra Bank by 25 bps;
• Firms can raise masala bonds; htm SLR cap cut to 21.5% from Jan 9

In his biggest rate move since taking charge as governor of the Reserve Bank of India (RBI), Raghuram Rajan on Tuesday cut the benchmark repurchase rate by 50 basis points to a four-and-a-half-year low of 6.75 per cent. All his previous rate moves, up or down, had a magnitude of 25 basis points.

The rate cut in the year's fourth bi-monthly review of monetary policy surprised India Inc and market players, expecting a 25-bps cut this time, too. The central bank has cut the repo rate by 125 bps since it first started lowering the rate in January this year.

"I don't think we have been excessively aggressive," Rajan told a post-policy news conference, adding falling global commodity prices had helped RBI "front-load" the easing. "Clearly, this was about, given the state of the economy, how can we move forward?" he said, reflecting widespread concern that growth was losing momentum.

Reduction in the policy rate, however, came with a veiled warning to banks that they had reduced the median base lending rate by only 30 basis points, a fraction of the 75-bps policy rate reduction during January-June, despite easy liquidity.

Banks took the cue, with State Bank of India (SBI) reducing its key lending rate by 40 bps to 9.3 per cent, the steepest base rate cut by any bank so far. With this, SBI's base rate is lower than that of HDFC Bank, which reduced its base rate by 30 bps to 9.35 per cent earlier this month. Two other state-run lenders, Bank of India and Andhra Bank, reduced their base rates by 25 bps. Both also reduced their deposit rates by 25 bps.

After announcing the base rate reduction, Arundhati Bhattacharya, chairman, SBI, said more scope for a cut in lending rates would emerge, as deposit costs fell. "Going forward, as the book re-prices properly and as we begin to see more credit growth, we will definitely keep looking at ways and means of bringing down the rates further," she said.

Chanda Kochhar, managing director and chief executive of ICICI Bank, said interest rates/base rates would come down, as a large part of the cut would be transmitted. "When I say a large part of the cut will be transmitted, it would mean more than half," she said.

The central bank lowered its near-term inflation projection for January 2016 to 5.8 per cent from six per cent, citing lower oil prices. However, a slower pace of recovery in growth was also projected; the economy is now seen as growing 7.4 per cent in FY16, compared with the 7.6 per cent projected in August, owing to deficient rains, weaker global growth and weak investment momentum in the private sector.

RBI said inflation could inch up, as a favourable base effect waned in the next few months. It, however, added the monetary policy had to be accommodative to the extent possible.

Finance Minister Arun Jaitley, who has pushed for rate cuts, welcomed Rajan's decision, saying it "will significantly provide policy support to the real economy and help in the recovery process". His ministry announced a plan to review a small savings programme that competes with banks for deposits, to ensure faster transmission of rate cuts.

India Inc was happy. Mahindra Group Chairman Anand Mahindra said the central bank's move was a right and timely medicine, while RPG Group Chairman Harsh Goenka termed it the silver bullet business had been waiting for.

Analysts said the prospect of additional easing was unlikely for a while, with the focus now likely to shift to a government that has struggled to get its reform policies passed by Parliament.

Markets reacted positively, as the cut in policy rate exceeded their expectations. The benchmark Sensex, which was  about 250 points lower before the policy announcement, ended the day up 161.82 points, or 0.63 per cent, at 25,778.66. The Nifty added 47.6 points, or 0.61 per cent, to close at 7,843.3, as rate-sensitive stocks gained after the rate cut.

"The rate cut has been taken very positively by the market. While all global markets were down, Indian markets closed up. We will get a clearer picture tomorrow (Wednesday), once all the dust settles," said Anoop , head of equities at UTI Mutual Fund.

Bond yields fell sharply on the back of the 50-bps rate cut, as well as measures announced by the central bank to attract more investment in the bond market. Yields on the 10-year benchmark government bond fell 12 bps to 7.61 per cent on Tuesday and are seen further softening to 7.5 per cent by the end of the year.

Apart from setting limits for foreign  in debt securities in fixed rupee terms, the central bank also announced the cap would be increased in a phased manner to five per cent of the outstanding stock by March 2018.

"In aggregate terms, this is expected to provide room for additional investment of Rs 1,20,000 crore in the limit for central government securities by March 2018, over and above the existing limit of Rs 1,53,500 crore for all government securities," RBI said.

The central bank has allowed Indian companies to raise  from foreign markets in rupee-denominated bonds, often called 'masala bonds', a move Jaitley said would provide an additional source of funding and boost investment in the economy.

The bonds will have a maturity period of at least five years at foreign locations, within the $51-billion ceiling of foreign investment in corporate debt. Jaitley said now, companies would also be able to raise external commercial borrowings through rupee-denominated off-shore bonds with no end-use restriction.

In February, RBI had reduced the statutory liquidity  to 21.5 per cent. Now, it has decided to bring down the ceiling on SLR securities under HTM (held-to-maturity) from 22 per cent to 21.5 per cent, effective the fortnight beginning January 9, 2016. Subsequently, both the SLR and HTM ceiling will be brought down by 0.25 per cent every quarter till March 31, 2017.

The weakening of global activity since the last review suggested commodity prices would remain contained for a while, RBI said. "The monetary policy has to be accommodative to the extent possible" to help domestic growth offset weakness abroad, Rajan said, adding "capacity utilisation was still tepid and domestic private investment needed to pick up".

Significantly, Rajan directly linked the need for monetary stimulus to a revival in growth. "Investment is likely to respond more strongly if there is more certainty about the extent of monetary stimulus in the pipeline," he said.

Reference - http://www.business-standard.com/article/finance/rajan-goes-for-big-bang-cut-115093000071_1.html