With the Union Budget barely a month away, it wasn’t surprising the Reserve Bank of India (RBI) left the key repo rate unchanged at 7.75% after its monetary policy review on Tuesday. The central bank had pruned the policy rate by 25 basis points on January 15, signalling a turn in the interest rate cycle. Trimming the statutory liquidity ratio (SLR) by 50 basis points to 21.5% of banks’ net demand and time liabilities on Tuesday, the RBI reiterated its stance that the key to further easing would be data that confirmed inflation was easing and some high-quality fiscal consolidation.
The RBI allowed foreign portfolio investors (FPIs) to reinvest the interest earned on government securities beyond the $30-billion cap, though all future investments in the corporate bond market must be made in paper with a residual maturity of three years. In a blow to mutual funds, FPIs cannot invest incrementally in short maturity liquid, money market, mutual fund schemes.
The RBI said easier guidelines for pricing of instruments under foreign direct investment (FDI) would be made more flexible to encourage such investments. The central bank will also allow a more lenient asset classification for projects that are delayed and where managements are being changed. The RBI eased exposure terms for in the foreign currency market and in a move that suggested confidence in the country’s forex reserves, raised the limit under the Liberalised Remittance Scheme to $250,000 per person per year.
While retaining the inflation outlook at 6% for January 2016, RBI governor Raghuram Rajan said at a press conference the central bank would be comfortable with a real rate of around 1.50%-2.0%. “What we would like is for the real risk-free policy rate to be 1.5-2.0%,” Rajan said, making the timing of the next rate cut somewhat uncertain.
Rajan said he expected banks to cut base rates as competition intensified. However, banks aren’t likely to cut lending rates anytime soon. As Arundhati Bhattacharya, chairman, State Bank of India (SBI), said, in the absence of a pick-up for credit demand, a cut in interest rates could take time.
“The signalling of the easing cycle is there and we will obviously be part of that cycle,” Bhattacharya told a television channel, adding that at this point she was not in a position to give a clear response.
Economists, however, believe that with inflation easing meaningfully and the government expected to deliver on the fiscal front, the central bank will have room to trim the policy rate by 75 basis to 7%. “While the recently revised GDP print of 6.9% in FY14 may suggest that growth is at potential we maintain our view of a further 75 basis points cut given the continued slack in some industries, our CPI outlook averaging 5.5%, RBI’s comfort for real rates at 150-200 basis points and the government likely to adhere to its fiscal consolidation roadmap,” Citibank chief economist Rohini Malkani wrote.
The cut in the SLR is immaterial in the current situation in which banks together hold government securities of close to 28% of the net demand and time liabilities.
Central to development:
* Repo rate under LAF unchanged at 7.75%
* SLR of SCBs reduced by 50 bps from 22% to 21.5% of their NDTL from February 7
* ECR facility replaced with system-level liquidity from February 7
* Forex remittance limit enhanced to $250,000 per person from $125,000
* Reinvestment of coupons in gilts by FPIs even when $30-billion cap utilised
* Future FPI investment in debt market only in paper with a minimum residual maturity of 3 years.
* Easier norms for pricing instruments under FDI to encourage investments
* To permit stock exchanges to introduce cash settled Interest Rate Futures contracts on 5-7-Year and 13-15 year G-Secs
* Domestic entities and FPIs will be allowed to take foreign currency positions in the USD-INR pair up to
$15 million per exchange
* New ownership or management of a company will merit an extension in date of commercial operation of an asset with no impact on asset classification
* In talks with Sebi to make it easier for conversion of debt into equity. RBI guidelines expected in 3 months.
* Allows banks to prospectively reverse excess provision in books when NPAs sold to ARCs and cash received exceeds the book value of the asset
* Evaluation for small and payment banks licences