RBI may go soft on key rates | RBI to keep dovish stance on rates

RBI may go soft on key rates RBI to keep dovish stance on rates

The Economic Times, July 24, 2009, Page 1 & 11

RBI IS EXPECTED TO retain its soft interest rate bias at next week’s quarterly policy review even if it doesn’t cut key policy rates, reports Our Bureau from Mumbai. Despite the negative headline inflation number, it’s widely felt that inflation will begin to surge post-October. Hence, RBI may not tinker with key rates even as it persuades banks to lend more.

Soft Rate Bias Likely To Continue In Policy Review, Even If Key Rates Are Not Cut

Our Bureau MUMBAI

RBI is expected to retain its soft interest rate bias at next week’s quarterly policy review even if it doesn’t cut key policy rates.

The central bank is already sensitising the market on the need for an orderly withdrawal of liquidity that has been pumped in since the collapse of Lehman. Most world markets, other than LatAm, are believed to be done with rate cuts, and central banks are now thinking of ways to minimise the pains of liquidity rollback.

Despite the negative headline inflation number, it’s widely felt that inflation will begin to surge post-October. Under the circumstances, RBI may not tinker with key rates.

However, with bank credit growth slowing to 16.3% year-on-year, RBI will use all its suasive powers to get banks to lend more. “Governor Subbarao is likely to point out to bank chiefs that lending rates have not fallen by half as much as RBI’s policy rates,” said Sujan Hajra, chief economist with Anand Rathi Securities, who does not expect the governor to revise any of his policy rates.

SBI chairman OP Bhatt had recently said the central bank may lower its 20% credit growth target.

According to Mr Hajra, “RBI’s focus will be to ensure that the government’s borrowing progresses smoothly. To achieve this, it may increase commitment to open market purchases and could also do away with the special dispensation that allows banks to leverage up to 150 basis points of their statutory liquidity ratio for on-lending to finance companies.” A higher SLR requirement will sustain demand for government securities. (SLR requirements specify the extent of bank deposits to be invested in government securities.).

While a benign rate regime will be good for borrowers, it might not work in favour of banks. Despite the best efforts of banks, bond yields are likely to continue edging upwards because of the oversized borrowing plans of the government. “We expect bond yields to harden in the fourth quarter and remain hard for the whole of the next fiscal,” said Mridul Saggar, chief economist with Kotak Securities.

Mr Saggar feels there is no alternative but to return to fiscal prudence. “Fiscal borrowing is large and requires accommodation. The first best solution for this is to control the fiscal deficit,” he said.

Economists are unanimous in their view that the central bank is unlikely to take any measure that would derail the growth momentum. At worst, RBI is expected to maintain status quo. At best, it could bring down the reverse repo rate. However, most economists see this as a remote possibility.

Besides using moral suasion, bankers expect RBI to ease norms to encourage banks to lend. One possibility is that lenders will get more leeway for restructuring loans. This would allow them to rework loan agreements to give more time to a stretched borrower without having to classify the loan as a bad asset. There could be boosters for infrastructure financing by easing capital requirements on take-out financing—deals where a long-term financier agrees to take over a longterm loan initially disbursed by a bank.

IN LARGER INTEREST

With inflation expected to surge post-October, RBI may not tinker with key rates

But it is sensitising market on need for orderly withdrawal of liquidity pumped during crises

Most world markets are said to be done with interest rate cuts

RBI is likely to ease norms that will encourage banks to lend, such as more leeway for restructuring loans

There could be boosters for infrastructure financing by easing capital requirements on take-out financing

Time overruns may be condoned when there are no defaults