SLR cut to tackle liquidity woes: D-Street, India Inc react to RBI money policy

RBI's fifth policy review for 2018-19 on Wednesday turned out to be on the expected lines.

The central bank also chose to keep its calibrated tightening stance intact, which was changed in October. MPC member Ravindra Dholakia voted for reverting to neutral stance though.

The Monetary Policy Committee (MPC) kept repo rate — the rate at which the central bank lends to banks — unchanged at 6.5 per cent.

The central bank said starting in the January-March quarter of 2019 it would begin to lower banks mandatory bond holding ratios by 25 basis points each quarter until it reaches 18 percent of deposits, Reuters reported.

The so-called statutory liquidity ratio (SLR) currently stands at 19.50 per cent and the move to lower the SLR should prod banks to lend more rather than park their cash in safe-haven government securities.

Here's how analysts reacted to the latest round of policy action by the RBI.

Abheek Barua, Chief Economist & Executive V-P, HDFC Bank
I think very quick flip flops in what is broadly known as the stance can be very confusing for the markets. Given the volatility all around, we should underplay the role, the very notion of stance. The other thing that I want to comment on is that liquidity and liquidity management has over the past been outside the MPC's remit and you might see some mention of more aggressive liquidity infusion and management in the press conference. In any case I think they are infusing liquidity through open market route.

Motilal Oswal, CMD- MOFSL
RBI board left Repo rate unchanged at 6.5%. this is not a surprise and was more or less expected. Looking at the current liquidity situation challenges RBIs wait and watch stand is justified.

In the past few quarters, equity markets have been expecting earnings momentum to kick in, but that has not happened because of various macro challenges, such as falling INR , sharp increase in Crude etc. In last few days we have seen things turning around. Easing Crude and appreciating INR amongst others will return confidence of Indian Corporate sector. We think after going through turbulent time over last few quarters, the tenacity of the economy is well tested and now it is ready to move back again ,onto growth trajectory. We think this enabling environment will allow corporate earnings momentum to come back.

Nilesh Shah, MD, Kotak AMC
RBI is caught between the devil and the deep sea. They cannot change their stance so frequently because the base has changed. Now they could create a situation where the stance remains calibrated tightening and at the same time, they can enhance liquidity which has remained in the negative zone since September 2018 and that has cast its own shadow on the growth side.

Abhimanyu Sofat, Head of Research, IIFL Securities
The reduction in inflation forecast to 2.7-3.2 per cent from 3.9-4.5 per cent should have ideally led to lesser hawkish monetary policy. As the shift in policy stance was done in the last meeting it was difficult for RBI to reverse the same. If one sees continued benign data on inflation front, then one can hope for increased liquidity from RBI going forward to support credit growth.

Raj Mehta, Fund Manager, PPFAS Mutual Fund
Even though RBI has maintained their stance, they have lowered their inflation expectations going ahead with crude prices falling and the soft CPI inflation numbers which we saw last month. I would not be surprised if we get a repo rate cut in the 1st half of 2019.

Shishir Baijal, CMD, Knight Frank India
The decision on keeping the key policy rates unchanged is on expected lines and will be a relief for the real estate industry that has been worried over a possible rate hike adversely impacting the market. Since the last Monetary Policy Committee Meeting, there has been a big relief with the fall in crude prices and the strengthening of the rupee, thus reducing inflationary risk. We believe the easing inflation situation and the need to actively support growth are the primary consideration for the MPC to maintain a status quo on rates.

Sonal Varma, MD & Chief India Economist, Nomura
One should also not forget that incrementally there are signs of a synchronised global growth slowdown and whether or not the government on the fiscal side slips, that remains a question mark… So, let us see how the full benefit of lower oil prices and trade tensions which have been postponed temporarily, plays out over the next six to nine months. The impact of the tighter financial conditions is yet to be seen. Our view is RBI will need to be a lot more proactive in injecting durable liquidity going forward.

Sujan Hajra, Chief Economist, Anand Rathi Financial Services
RBI decision to keep the key interest rates unchanged has been in line with expectations. Softening of retail inflation and global crude oil prices, dovish statement issued by the US Fed and easing of geopolitical concerns coupled with deceleration of GDP growth in Q2FY19 have been the reason behind RBI's decision. Calibrated reduction of SLR announced in the policy is in line with the long-term strategy of the RBI to scale down pre-emption of bank resources by the government without undermining quality of bank balance sheet. This step, however, may harden yields in the government securities market as the process would allow banks to reduce government security holding cumulatively to the tune of Rs 2 trillion. Barring large unexpected developments, we expect the RBI to remain in the pause mode for the reminder of FY19.

Sampath Reddy, Chief Investment Officer, Bajaj Allianz Life Insurance
RBI announced SLR cut by 25 bps from beginning of 2019 to 19.25%, followed by progressive cuts every quarter until the SLR comes to 18%. Although this will reduce appetite for G-Secs from banks who are presently sitting on excess SLR, it will be beneficial for banks who will have buffer to lend more — thereby benefitting credit growth. The governor also indicated that if upside risks do not materialise, then it could open up space for future policy action, therefore keeping it data dependent. Bond yields have reacted positively and have softened post the policy announcement. We had increased duration in our portfolios over the past month, and with yields having already factored in the outcome of the policy, we now prefer the shorter to medium term segment of the yield curve

VK Vijaykumar, Chief Investment Strategist, Geojit Financial Services
Though the policy rates and stance remain unchanged, the macro environment and the message that the central bank conveys is that it is likely to be on a prolonged pause in rates. The crude crash has ensured that inflation will remain well within RBIs comfort zone. Financing the CAD will not be a worry since FPI inflow has resumed after the dovish message from the Fed and marked deceleration in US bond yield. We feel there is no possibility of a rate hike anytime soon; nor is the central bank likely to oblige with a rate cut. But the policy stance is likely to a change to neutral in the next policy announcement. The calibrated cut in SLR is desirable in the present context of liquidity squeeze.

Dheeraj Singh, Head of Investments- Taurus Asset Management
Surprisingly, RBI has lowered their forecast for inflation in the second half of the current financial year to 2.7%-3.2% and 3.8%-4.2% in the first half of 2019-20. The lower than expected inflation print witnessed recently seems to have surprised the committee members and they probably view this as an aberration and therefore have maintained their “calibrated tightening” stance. However, this doesnt gel with their significantly lower inflation forecasts. It appears that the committee seems to be preparing itself to return to a “neutral” stance on monetary policy in the near future, possibly as early as February.

Mustafa Nadeem, CEO, Epic Research
This policy was focused on one thing that was out loud in its recent meet and it was Liquidity. RBI is at a very comfortable stage, comparatively with crude being down to $50 mark and INR appreciating around 5 per cent. The inflation will see the impact and is now projected at 3.8 per cent to 4.2 per cent in 1H2019 by RBI while in the range of 3 per cent in the second half of 2019. The liquidity, which was seen as a crunch, is now being addressed with adjustments in SLR. Hence this is a clear statement by the RBI that they will be addressing the liquidity issue through the system and not focused on the recent NBFC fiasco. Though, it was also important to note that governor clearly mentioned that there may be a change in its stance. Hence, a change in its rates going forward when needed. Markets are at peace with this.

Kunal Shah, CFA, Fund Manager, Kotak Mahindra Life Insurance
From the bond market perspective, status quo was priced in, but a sharp revision in inflation projection has come as surprise. Yields have dropped 10 bps post policy to 7.45 per cent. The downward revision in projection appears a tad sharp to us, especially when MPC sees no reason to soften to a neutral stance. 2018-19 will be the second year of sub 4 per cent inflation with H1 2020 projections at 4 per cent within the target mandate. Bond yields should be trading with softening bias supported by high real rates and continual commitment by RBI to conduct more OMO purchases.

(Disclaimer: Views are personal)

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