The Reserve Bank of India (RBI) may look at reducing the policy rates post monsoon, depending on two major factors -- crop output and lower inflation rate.
The RBI's bi-monthly statement on Tuesday kept the key repo rate – that rate at which banks get funds from it against government securities – unchanged at 8%, but induced liquidity into the system by lowering banks' mandatory investments in government bonds or statutory liquidity ratio (SLR) by 50 basis points to 22.5%.
RBI governor Raghuram Rajan's move to leave repo rate unchanged and lowering SLR despite banks sitting on excess SLR to the tune of 28-28.5% of their net deposit base may not have an immediate bearing on lending rates.
Keki Mistry, vice chairman and CEO of HDFC told dna, "The RBI policy of lowering SLR is a precursor to a softening rate trend. For now, the likelihood of an increase in rates is surely on the decline. There is a strong investment cycle in the offing from foreign institutional investors who are yet to come to India based on the growth potential India has to offer. My sense is that the RBI could look at lowering rates once it gets a sense of how the monsoon is going to be."
Bankers and economists see this as an indication that credit offtake would begin to happen from July when the central government announces its budget for the year.
"The new government's budget is slated to be around the first week of July, and it is quite likely to be pro-growth and employment-focused, hence the RBI's step is in that direction," said a government bank official.
"The demand for credit has been slow and with hopes of policy change, investments by industries should take off," said K Harihar, treasury head at FirstRand Bank.
The RBI move came as a surprise to bankers as well as economists, who feel the act was well-balanced and without tampering with key rate that would have otherwise signaled the beginning of softer rate regime when the consumer inflation remains high at 8.59%.
"The RBI move is bold and indicates that it does not want the government to have a captive source of funds in SLR," said a senior bank official who did not wish to be quoted.
The revised reserve SLR requirement will become effective from the fortnight starting June 14 and usher in cheaper funds into the system to the tune of about Rs 38,000 crore.
Government's market borrowings through issuance of sovereign bonds are successful largely due to the mandatory SLR requirements stipulated by RBI for banks. No government would want the ratio to be tampered with as it forces the government to issue bonds at higher rates, increasing its costs to attract investors.
"The reduction of SLR will help in improving liquidity, however interest rate reduction is imperative to trigger growth and investments," said Hemant Kanoria, CMD of Srei Infrastructure Finance.
The RBI has also reduced the export credit refinance (ECR) facility from 50% to 32% with immediate effect but has offset the squeeze in refinance by making funds available through a special term repo facility.
The three measures – repo unchanged, SLR cut and ECR cut – are in line with the Urjit Patel recommendations of first addressing consumer inflation to 6% and second moving away from sector-specific finance," said Anis Chakravorty, senior director at Deloitte.
"The move to infuse liquidity through SLR cut, will attract investors to borrow at favoured rates, he said.
Most bankers, however, do not expect the RBI to tamper with the key rates in the next policy announcement of August 5.
The RBI governor has raised concern on the continuing sluggishness in the domestic activity in the first quarter of the current year. Besides the outlook for agriculture was also a worry due to the prospects of monsoon delay and forecast of El Nino, which could bring in a drought-like situation.
"It is difficult to predict when the rates would begin to slide. There are too many factors to consider like the monsoon, crop prospects and inflation," said Chakravorty.