Monetary Policy: Banks get Rs 21,000 crore more to lend

The first bi-monthly monetary policy of the current fiscal has seen the Reserve Bank of India (RBI) cutting down repo rate by 25 basis points to 6.5% and lowering of Cash Reserve Ratio (CRR) and Marginal Standing Facility (MSF). Care Ratings said that the move is likely to pump in Rs 21,000 crore into the system. 

"The liquidity issue with banks caused by lower growth in deposits has been addressed partly by lowering the minimum daily balances to be held under CRR. Banks will gain to the extent of around Rs 20-21,000 crore on this count. However, this is lower than the impact of a CRR reduction of say 0.5% which would have released around Rs 50,000 crore" Care Ratings said. 

The Reserve Bank has lowered Marginal Standing Facility (MSF) by 0.75% to 7.0% while the reverse repo rate under Liquidity Adjustment Facility (LAF) stands adjusted to 6%. The reverse repo rate is the rate at which the Central bank borrows money from the banks.

The RBI has reduced the minimum daily maintenance of the Cash Reserve Ratio (CRR) that banks have to maintain with the Central bank by 5% to 90% with effect from April 16.  

"Today, with the MSF being 100 basis points higher than the repo rate, the cost of funds has increased. By lowering the MSF rate, in effect, the call rates would tend to move down. Further, banks with surplus funds can earn more through the reverse repo window," cited the ratings agency. 

"Following the exemplary fiscal rectitude displayed by the government in its FY17 Budget, RBI’s 25 basis points cut in the repo rate and the shift in stance towards neutral money market liquidity conditions is a testament of synchronous policy support," said Yes Bank's MD and CEO Rana Kapoor. 

"With global economic activity remaining subdued and domestic disinflation becoming entrenched amid low capacity utilisation, I expect further 125 basis points monetary easing in the next 12-months,” Kapoor added. 

The State Bank of India's (SBI) Chairman also echoed similar views stating the policy is as per market expectations and fairly supportive of evolving macro scenario.

“The RBI decision to cut repo rates by 25 basis points was as per market expectations even as the liquidity management measures were a pleasant gift to the market," Arundhati Bhattacharya, Chairman, State Bank of India (SBI), said on Tuesday. 

"The decision to keep liquidity deficit at neutral mode and also narrowing the Liquidity Adjustment Facility (LAF) corridor will result in a predictable and stable liquidity regime going forward facilitating better transmission across financial markets. On the whole, the policy is fairly supportive of the evolving macro scenario.” Bhattacharya added. 

According to HDFC Bank, the Central bank's rate cut was predictable and it addressed recent fall in consumer-based inflation as well as the government's commitment to fiscal consolidation.

"The RBI’s decision to cut the repo rate was anticipated as it responded to both the recent fall in Consumer Price Index (CPI) inflation and the government’s commitment towards fiscal consolidation," said HDFC Bank's Chief Economist Abheek Barua. 

However, the rate cut took a backseat to the substantial changes that were made in the liquidity management regime, Barua said.

"After six years of adopting a regime in which the Central bank kept the liquidity in the banking system in a deficit mode on average, the RBI indicated that it plans to move to a neutral liquidity position. The changes made to the RBI’s liquidity management regime were also accompanied by the decision to narrow the policy rate corridor," he added. 

The RBI had said in a monetary policy statement that it would remain 'accommodative', raising the prospects of a further rate cut in the coming months.

"The new proposals were done primarily to aid in the transmission of monetary policy and ensure that the quantum of liquidity in the banking system was more compatible with the RBI’s accommodative stance," cited Barua. 

Real estate development company HDIL has welcomed the Reserve Bank's stance of reducing the repo rate by 25 basis points. 

"Being the first bi-annual monetary policy of the year 2016-17 and considering the existing economic conditions in the country, there was a need for a rate cut. This cut will help in giving the desired push for the economy. We appreciate the RBI’s move as the cut will help in reducing interest rates during the festive season. We expect home buyers will be benefited due to this cut," said HDIL's Senior VP-Finance Hariprakash Pandey. 

However, the real estate development firm had expected a higher rate cut due to less volatility in the international market and stability in the Indian economy.

"Considering less volatility in the international market, the stable Indian economy, and the real estate sector performance in the past few months, we had expected a higher rate cut, " Pandey said. 

According to Care Ratings, it will be interesting to see whether or not banks lower their deposit rates given that there has been a slowdown in growth in deposits in the fiscal year 2015-16.