RBI keeps repo rate unchanged at 7.75% - Livemint

Mumbai: Reserve Bank of India (RBI) governor Raghuram Rajan didn’t reduce policy rates on Tuesday—only diehard optimists would have expected him to—but he did make it easier for banks to pass on the interest rate cut he announced a little over a fortnight ago.

Rajan is expected to take interest rates down by 50 to 75 basis points this year. One basis point is one-hundredth of a percentage point.

The next cut, if it happens, could be timed around mid-March, and dependant on February inflation data and the government’s pronouncements and calculations concerning the fiscal deficit that will be presented in the Union budget on 28 February.

Rajan also incentivized banks to take control of companies defaulting on loans and talked of a possible new formula that would enable them to convert debt into equity at a lower price than that mandated currently by the stock market regulator, and also of allowing banks that had seized control of defaulters more leeway in defining the underlying bad loans.

On Tuesday, RBI kept the policy rate at 7.75% but increased the amount of cash banks have to lend by cutting the proportion of government bonds they must hold by half a percentage point.

This cut in the statutory liquidity ratio (SLR), or proportion of their deposits banks need to keep in government bonds, will make about Rs.43-45,000 crore available to banks for lending.

“This may push banks to respond to repo rate cut introduced on 15 January by RBI,” Bank of India chairperson V.R. Iyer said in a statement.

State Bank of India’s chairperson Arundhati Bhattacharya said the easing liquidity will help banks preserve their interest spread, or the difference between the yield on advances and the cost of deposits. The repo rate is that at which RBI lends funds to banks.

“With inflationary expectations at a 21 quarter low and coupled with a benign global environment, we are in the early phases of a prolonged rate easing cycle,” Bhattacharya said in a statement.

The cut in SLR could encourage banks to pass on the policy rate cut.

In India, the policy transmission takes roughly three quarters, according to Rajan.

In the policy statement, RBI said falling inflation has strengthened the impact of comfortable liquidity conditions on market interest rates, as reflected by the fall of at least 50 basis points in sovereign and corporate bond yields in the third quarter.

“However, despite a generalised fall in the cost of funds, banks have yet to pass through these effects, as also the effects of the policy rate cut on January 15, into the spectrum of lending rates,” RBI said in its policy statement.

Rajan said banks will have to cut their rates sooner or later to match market rates.

“Call money rates have come down, we have been infusing enough liquidity into the markets and therefore we will see transmission operate there because it will reduce the cost for corporations to borrow from the market. Banks will have to match that at some point,” he added.

Rajan’s comments come in the context of year-on-year bank credit growth sliding close to a five-year low as an economic downturn and a pile-up in non-performing assets dent demand for credit and makes banks wary of offering loans

The credit metrics of India’s top 500 corporate borrowers have slumped to the worst levels since the 2003-04 fiscal year, according to a December report by India Ratings and Research Pvt. Ltd , a Fitch group firm.

In its financial stability report released on 29 December, RBI said gross non-performing advances (GNPAs) of scheduled commercial banks had increased to 4.5% of total advances in September from 4.1% in March and net non-performing advances (NNPAs) rose to 2.5% from 2.2%.

Together with restructured assets, stressed loans increased to 10.7% of total loans in September from 10% in March. The stressed loans of public sector banks made up 12.9% of their total loan book, much higher than 4.4% at private sector banks.

Banks have also been wary after some incidents like the arrest of Syndicate Bank chairman and managing director S.K. Jain for allegedly taking a bribe to give loans in August last year.

The arrest and subsequent investigation on bank lending practices has meant even more reluctance to lend, especially among state-owned banks that also have the sword of the Central Vigilance Commission, which investigates wrongdoing in deals in government enterprises, hanging over them.

Since he took over in September 2013, Rajan has spoken about the need for banks to become aggressive with non-performing assets, and even take over control of the company or change the management. On Tuesday, he reinforced this message.

“In order to build confidence in bank balance sheets, we have to come to an end of forbearance. We have to put banks on the right track. We have given enormous amounts of new flexibilities in trying to put distressed projects back on track. But I do not think the answer is to pretend and extend or extend and pretend, it is to call a spade a spade. Do what is needed, including making new loans if necessary to complete the project, but move on beyond that,” Rajan said.

The pause on rates in Tuesday’s policy came as no surprise. In a Bloomberg poll, 31 of 41 analysts had expected rates to remain unchanged. Industry body Federation of Indian Chambers of Commerce and Industry said it expects the central bank to cut rates by another 75 basis points after the budget.

Other lobby groups like the Engineering Export Promotion Council and Confederation of Real Estate Developers’ Associations of India criticised RBI for not cutting rates.

On 15 January, RBI cut its signalling repo rate by 25 basis points to 7.75% in response to a fall in inflation. The cut was outside any formal policy cycle, but the central bank had guided earlier that softening prices may allow it to cut rates.

“We expect the RBI to deliver one more 25 bp (basis point) rate cut at the April policy and then leave the repo rate unchanged at 7.50% thereafter,” said Nomura Financial Advisory and Securities (India) Pvt Ltd.

“Clearly with the budget coming in a few weeks from now, the next rate cut now seems likely to be off-cycle, perhaps in the first week of March,” Deutsche Bank wrote in a note.

HSBC said it expects RBI to cut rates by 25 basis points in March and a final 25 basis points in June.

Retail inflation for December fell to 5%, from 6.46% in September and 10.79% in January last year.

“Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since 15 January, it is appropriate for the Reserve Bank to await them and maintain the current interest rate stance,” the central bank said in its bi-monthly monetary policy statement.

The cash reserve ratio (CRR), or the portion of deposits banks must maintain with the central bank, was held steady at 4%, but RBI scrapped the export credit refinancing facility for banks, citing improved liquidity conditions. The average daily net borrowings by banks through various liquidity windows were around Rs.85,000 crore in December and January.

The central bank did not give any firm guidance on inflation or gross domestic product (GDP) growth in this policy, considering the changing methodology in calculating GDP, but said growth prospects will be contingent upon a turnaround in investment and a durable improvement in the business climate to complement the upsurge in business optimism.

“Looking ahead, inflation is likely to be around the target level of 6% by January 2016,” it said, adding real GDP growth in 2015-16 will likely be centred around 6.5%.

However, these projections may need a relook after analysing the new revisions in GDP statistics and advanced estimates due on Monday, RBI said.

“By and large, inflation dynamics have so far been consistent with the assessment of the balance of risks by the Reserve Bank’s bi-monthly monetary policy statements, although with some undershooting relative to the projected path of disinflation,” RBI said.

The outlook for growth has improved modestly on the back of disinflation, real income gains from decline in oil prices, easier financing conditions and some progress on stalled projects, the central bank said, while maintaining a 5.5% GDP growth projection for the current year.

GDP growth fell in the September quarter to 5.3%, down from June quarter’s 5.7%. Still, it was higher than March quarter’s 4.6%.

RBI also announced two measures that will impact individuals directly. It has allowed Indian citizens to remit $250,000 abroad, up from $125,000 earlier. Further, the central bank said it is in the process of allowing non-callable fixed deposits up to Rs.1 crore from individuals and the Hindu undivided family. Non-callable deposits are ones where premature withdrawals are not allowed.

“Callability in a deposit will then be a distinguishing feature for offering differential rates on interest on deposits. Detailed guidelines will follow shortly,” RBI said.

Bond yields closed higher at 7.72%. The yields on the 10-year bond had fallen to 7.646% on Monday, a level last seen on 15 July 2013, as traders took positions expecting a rate cut. Bond yields and prices move in opposite directions.

The benchmark S&P BSE Sensex lost 0.42% to close at 29,000.14 points.

Separately, the central bank made it mandatory for foreign investors to put their money in bonds with a residual maturity of at least three years. However, it is not clear yet whether the present regulation will include a $2 billion investment limit in commercial paper, a popular segment with the foreign investors.

According to Jayesh Mehta , head of treasury at Bank of America Merrill Lynch, short-term paper floated by various non-banking finance companies will be impacted by the move and they will have some problem raising funds from the market.

At the same time, companies raising longer term money, like various government organizations and finance companies, will benefit marginally.

anup.r@livemint.com

Vishwanath Nair contributed to this story.