New direction to the markets?

The RBI Q3 Monetary policy 2012-2013 is out. Here is a snapshot:

Repo Rate

It has been decided to reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 8.0 per cent to 7.75 per cent with immediate effect.

Reverse Repo Rate

The reverse repo rate under the LAF, determined with a spread of 100 basis points below the repo rate, stands adjusted to 6.75 per cent with immediate effect.

Marginal Standing Facility (MSF) Rate

The Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points above the repo rate, stands adjusted to 8.75 per cent with immediate effect.

Bank Rate

The Bank Rate stands adjusted to 8.75 per cent with immediate effect.

Cash Reserve Ratio

It has been decided to reduce the cash reserve ratio (CRR) of scheduled banks by 25 basis points from 4.25 per cent to 4.0 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning February 9, 2013. As a result of this reduction in the CRR, around 180 billion of primary liquidity will be injected into the banking system.

Guidance

With headline inflation likely to have peaked and non-food manufactured products inflation declining steadily over the last few months, there is an increasing likelihood of inflation remaining range bound around current levels going into 2013-14. This provides space, albeit limited, for monetary policy to give greater emphasis to growth risks. The above policy guidance will, however, be conditioned by the evolving growth inflation dynamic and the management of risks from twin deficits.

Expected Outcomes

The policy actions and the guidance in this Statement given are expected to:

i) support growth by encouraging investment;

ii) continue to anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation; and

iii) improve liquidity conditions to support credit flow.

Time for my Comments now

As expected, there was a small tweaking of 25bp in CRR, BR, Repo, Reverse Repo et all. More money available to banks, liquidity infused but where is the off take?? Especially given the scenario that bigger banks, though professing to pushing up credit off takes to MSMEs, are still not visible on the radar, doing it. The large corporates though seem to enjoy this. And so are the Home loan and Car Loan customers (Car Loans). But even the low interest rates that Banks like SBI are offering to the Personal Segment customers, doesn’t seem not to prop up the respective industries. The Car companies seem to be in a swing, going up one month and down the next, using old tricks like reminding the customers about the impending hike in car prices which do not seem to come at all. The Realty sector seems to be hit harder, what with all the major banks stalling credits to them and coupled with the customer disinterest (or is it purchasing power?) it has stifled the Builder lobby, who now seem to resorting to reducing prices to induce buyers and reduce their inventories that they had built up over the years in the hope of better days. Then, is the liquidity only to bail out a few banks that were borrowing at higher rates in the Repo market? Let me try to deconstruct this.

So what does this INR 180 billion of increased liquidity lead to? For one, it gives a minor fillip to those banks that are short on the liquidity front, the markets next and specifically the interest rate sensitive stocks that will benefit a little, followed by a reversal to the pre Q3 Policy positions. Then, it is the turn of RBI, who will claim they have done the best to help the situation and that it is the Banks that need to now lead the way.

And what do the Banks do then? Firstly, reduce interest rates on loans, though which market segments, needs to be seen. I guess it’s going to be the Personal segment that will get the nod, followed by the SME segment. But then, are the banks as willing to lend to the SME segment as freely as they do to the Personal segment? Because the past record (and I am talking about the Bigger Public sector Banks over the past 12 months or so) is not that encouraging. And then, for those Banks that are slightly tight with their funds, are they going to decrease their loan interest rates? So, then if this is not going to happen, then what to do with the excess liquidity that some of the banks will have? Simple, disinterest people from keeping money with them by decreasing interest rates on deposits by 50bp or more over longer term maturities. As for the banks tight with liquidity, it is going to be a Sword of Damocles. Neither here nor there but only with certain level of relief.

The loser? The small investor who will get lesser worth for the money with the Bank, and my guess is that the already thin differential that they get after factoring in the TDS and the inflation, will get into negative territory, if not yet happened.

The gainers? The Banks. They get to keep the mollah (i.e. be risk averse) and increase their spreads by a few basis points by leveraging the drop in deposit interest rates. Other gainers? The Personal segment borrowers who get better interest rates on loans and better deals on their houses and cars. And then there are the large corporates that get to enjoy the lowering of the bank rates and the consequent shift downwards in their already low credit interest rates. So is it a new direction to the markets? Your guess is as good as mine.

Fingers crossed.

Amen