JOIN USMarkets need aggressive arguments in favour of liquidity, namely, sharply lowered lending rates, more incentives for FIIs to invest in key sectors, higher interest rates on stakeholdings, and some help from RBI in achieving these onerous shareholder goals.
Monday’s announcement by RBI of a modest 25 basis point cut in the cash reserve ratio (CRR), though with unaltered repo and reverse repo rates, understandably, did not assist the market in sustaining its FII-inspired rally. The latest CRR cut releases Rs 17,000 crore into the banking system which the banks, will hopefully, utilise to improve their dismal credit-to-deposit (CDR) ratios which earlier CRR reductions and ‘credit creation’ by RBI failed to inspire. A non-starter by the banks to right things this time around would only make their CDR and net interest margin figures for September look as dreary as their credit disbursal record to the rural farming sector did in June.
Banks talk of lending being a double-edge sword where lowering lending rates can free up credit to the priority sector, but also lead to greater pressure on their margins and NPA positions. Here, more than focussing on curbing inflation or spurring growth -- where RBI expects stronger and decisive government plays -- the apex bank has placed the onus of taking on the CDR challenge facing the industry on its subordinate banks. At this stage, any RBI hopes of carrying through more substantial rate cuts on the lending front rest on government’s ability to further contain fiscal deficit and wholesale price inflation and drive the economic and industry reforms engine.
The RBI cut effective September 22 will enlarge October headline inflation readings (10.03 per cent in August) by at least 30 basis points and make fiscal deficit management a little more unwieldy. Contextually, the government’s continued violation of the Fiscal Responsibility and Budget Management Act does it no credit either – not till efficient subsidy management against budgetary allocations is handed over to an independent government agency and excessive public expenditure is curtailed further.
This is a necessary ingredient in shaping the outlook of the economy for the medium term which will be shaped by the successful implementation of reform measures to boost investor sentiment and improve capital flows. Markets which have always viewed monetary policy as a ticket to either investor heaven or hell should take the cue.