Liquidity slosh, not rate cut, on RBI's mind

Reserve Bank of India (RBI) is likely to talk about liquidity management in the banking system and raise concerns on the growing bad loan problem at Indian banks when it unveils its monetary policy on April 6, the first in the new financial year.

Venkat Nageswar, deputy managing director - global markets, State Bank of India (SBI), said, “We expect a status quo in rates as RBI will draw comfort from the US Federal Reserve’s announcement that it will hike rates only two times during the year, which has left arbitrage opportunities for the foreign portfolio investors (FPIs), and oil prices have also remained steady at around $50 a barrel.”

"But we expect the RBI to announce the need to conduct reverse repo and term reverse repo operations without collateral and also on measures to tackle bad loans,” he said.

With banks sitting on close to Rs 10.73 lakh crore of deposits, the central bank will have to devise new ways to absorb the excess liquidity but may keep the rates on hold.

Abheek Barua, chief economist, HDFC Bank, said, “Do not expect any rate cut, but I expect them to announce some instruments to suck out excess liquidity like repo without a collateral. But broad changes like the announcing the setting up of a bad bank may lie outside the purview of the central bank.”

The sufficient liquidity in the banking system may not let RBI cut rates tomorrow. Some economists expect RBI to announce the formation of a bad loans bank that will buy up bad assets from banks.

SBI Ecowrap said in a report, “We are maintaining status quo on repo rate in April policy. In the post demonetization period, aggregate deposits have increased by Rs 4.27 lakh crore. Interestingly, even after withdrawals limits have been removed the average withdrawal has declined significantly in March from January levels. Hence, it is now important to innovate a mechanism to manage such liquidity. We strongly recommend that the RBI avoid disruptive modes of liquidity absorption like CRR hike."

Bank of America expects the Monetary Policy Committee (MPC) to hold rates as it shifted to a neutral from accommodative stance last time. Still, it will likely keep the door open for further easing with growth slowing, benign inflation and the need to attract FPI inflows by supporting growth, it said in a report.

With gross NPA of banks expected to hit Rs 9 lakh crore by the end of March 31, 2017, RBI is likely to talk about how the rising rot of bad loans should be resolved.

Economists at Bank of America think that RBI will likely initiate a quasi-government asset management company to address bank asset quality. Finally, it may lay out a roadmap to introduce a standing deposit facility by amending the RBI Act to refine the monetary framework.

DBS hopes the monetary policy would be on cruise control. "The repo rate will be held steady at 6.25% in the April policy review and rest of the year. Beyond this, the next move is more likely to be a hike rather than a cut," it said in a report.

But with the US Federal Reserve of the US saying that it would normalise policy rates close on the heels of the European Central Bank considering a reduction in its asset repurchase, it is unlikely that RBI would embark on a rate hike cycle just yet.