MUMBAI: Reserve Bank of India Governor Duvvuri Subbarao left interest rates unchanged citing worsening inflationary expectations and little signs of improvement in government finances, but said there is scope for a cut, leaving the timing of it wide open.
The RBI lowered the proportion of government bonds that banks should hold, providing a window for higher lending to industry, but that may not translate into lower rates soon since banks prefer to own safe bonds amid rising bad loans.
RBI lowered the economic growth forecast citing worsening global conditions due to the sovereign crisis in Europe and domestic obstacles to boost supply, but raised the inflation estimate with a warning that even manufacturing prices could rise if global commodity prices climbed.
"In the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth," Subbarao said. "As the multiple constraints to growth are addressed, RBI will stand ready to act appropriately."
Statutory liquidity ratio (SLR), the proportion of deposits banks have to hold in government bonds, was cut to 23% from 24%, theoretically releasing close to 60,000 crore for private borrowers. Repo rate, the rate at which RBI lends to banks, is unchanged at 8% and reverse repo rate, the rate it pays banks when they deposit funds, remains at 7%. Cash reserve ratio, the proportion of deposits banks have to keep, is at 4.75%. None of the 18 economists and traders polled by ET forecast the move.
"The impact of SLR is there would be more liquidity available to lend," said Chanda Kochhar, CEO of ICICI Bank. "How soon does the credit pick up, vis-a-vis how soon banks release liquidity out of SLR, is something that we would have to watch to be able to gauge the impact on interest rates."
Bond prices fell, expecting interest rates to head higher. Yields on 10-year benchmark bonds rose 8 basis points to 8.22%.
OPPORTUNITY FOR PRIVATE LENDERS
Bond prices and yields move in opposite direction. The rupee fell 0.10 paise to 55.65 per US dollar amid easing of curbs on currency hedging. The Sensex gained 0.5% to 17,236.18.
The effect may be minimal as banks, dominated by the public sector ones, now own around 29% of their deposits in government bonds, well above the stipulation. In this weak economic scenario, the fear of bad loans will force lenders to own higher government bonds, nullifying the RBI action. But it may be an opportunity for risk-taking private sector lenders to boost their profitability.
"The SLR cut will infuse extra liquidity and bring down lending rates in future," said Shailendra Bhandari, managing director and chief executive at ING Vysya Bank. "Margins would also improve by 1-2 basis points."
Although an SLR cut is a minor positive, the economic situation remains bleak.