The Hindu Business Line : Market View

While there was widespread belief that RBI would remove the Liquidity Adjustment facility (LAF) corridor or put a higher ceiling to the current limit of Rs 3000 crore, once again RBI Governor has surprised the market by putting no limit on LAF corridor and hiking the CRR by 50 bps. As usual, the RBI has retained the flexibility of conducting REPO/Reverse Repo at variable rates for different periods as they feel fit on an ongoing basis. CRR hike as per the initial estimate is likely to take out close to Rs 15,000 crore liquidity from the banking system. It is to be noted that CRR does not earn anything for Banks. At the same time, Banks with surplus liquidity would get to gain by deploying the funds at 6 per cent under LAF mechanism thus earnings higher return than that is prevailing today. With this move of RBI, one can assume easy overnight rate would get now realigned to LAF rate thus pushing up the short-term interest rate. This, in our view, holds the potential of putting a check on easy money flowing into unwanted or unwarranted assets thus creating unexpected upward price movement across different asset class.

Birla Sun Life Mutual

The thrust of the policy this time clearly was on liquidity management & anchoring inflationary expectations, which are higher on “people’s mind”. Though RBI has a medium term target of 4-4.5 per cent on inflation, it seems to be keen on managing the “inflationary expectations”, especially with a weak pass through of crude oil & some of the food prices and persistence of some demand pressures.

RBI reiterated the fact that though India remains exposed to global instability risks; it continues to be a “domestic driven” economy with 90-95 per cent of the investment is financed out of domestic savings. RBI also laid thrus t the “financial instability risks” which emanates from the existence of short term players like hedge funds and the global repricing of risk Nevertheless it’s important for RBI to maintain vigil on the global developments. RBI was silent on the foreign exchange policy, except for the fact that it would try to minimize excess volatility. The clarity on this front would have been useful. Banks would probably not hike lending rates, since the loan growth had already slowed down. But if the excess liquidity continues, the banks might cut deposit rates to maintain there margins. It’s likely that RBI would continue to intervene in the foreign exchange markets to protect the rupee. RBI’s sterilisation will keep the belly of the curve higher and the long term rates are likely to be stable with most of the monetary variables such as credit growth, deposit growth etc within RBI’s comfort zone.

Quantum Mutual

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