RBI Stumps with Rate cuts !

Over the week-end the RBI surprised every one and especially me with its Knife skills !.

I had been going round the corporates telling them that it would take few more weeks for the short term loan rates to come down and the market is not yet liquid enough to pass on lower lending rates to corporate’s. Further, I went to the extent of claiming that there world be no cuts in CRR at least till next month as the monetary policy has been concluded and RBI will not go for the cuts despite the US Fed lowering the FED rate last week.

However I was stumped out of my slumber, my inexperience, as you might claim it ….(in life expect the unexpected)…….So what did RBI do?

• Cut the CRR by 100bps to 5.5%


• Repo rate by 50bps to 7.5%


• SLR reduced by 100bps to 24%.
  
  (in case you need clarity about any of the above concepts, put in your comments, we shall get back to you with Vitamin-C (clarity) !!!

The RBI also announced various liquidity injection measures. These include:
(1) Introduction of a special re-finance facility for banks up to 1% of their NDTL for a period of 90 days.
(2) Extension of liquidity support to mutual funds and NBFCs by allowing banks to avail liquidity support up to 1.5% of their NDTL from 0.5% earlier.
(3) Proposed buy-back of MSS securities. RBI buying back these bonds will replace interest-bearing securities that the banks hold, with plain cash—and that will give banks additional incentive to lend to customers.

The total liquidity injection from the weekend's move works out to Rs1,200bn (US$24bn), i.e. Rs400bn via the CRR cut and Rs400bn each via the refinance facility and extension of liquidity support to MFs/NBFCs.

What have the recent/latest triggers to provoke RBI’s rate cutting spree?
(1) FX reserves were down US$15.5bn in the week ending Oct 24, owing to continued RBI intervention, higher trade deficit, portfolio outflows, revaluation and demand from Indian corporates to meet overseas requirements - given that overseas markets have dried up.

(2) System being liquidity short again. Overnight call money rates rose to a high of 21%, which is the result of RBI's fx intervention (i.e. when RBI sell dollars, it sucks out INR liquidity) as well as demand from corporates which were redeeming some of their investments in mutual funds and using the proceeds to buy dollars to meet their overseas requirements

(3) WPI Inflation was down to 10.68% for the week ending Oct18 - marking a 5th consecutive week of decline from its peak of 12.9% seen on Aug2. Given the sharp decline in commodity prices resulting in an adjustment in prices of ATF, naphta and furnace oil, it is expected that inflation would fall to single digits shortly

So what's the impact?

The immediate benefit of these RBI's would result in easing the domestic liquidity situation.

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