X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Monetary Policy: Will SLR cut do the trick? - Views on News from Equitymaster
  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Monetary Policy: Will SLR cut do the trick?
Jul 31, 2012

As usual, the Reserve Bank of India (RBI) monetary policy announcements was highly anticipated this time as well. This is because of the central bank's power to ease liquidity costs and pump growth rates. But, for the second time since April 2012, the central bank decided to keep rates unchanged. Under current circumstances the RBI believes that easing policy rates would only stoke inflation, and not necessarily stimulate growth.

The RBI maintained status quo on the policy rate front. It kept the cash reserve ratio (CRR) for banks at 4.75% and the repo rate unchanged at 8%. The rate at which RBI borrows from banks (reverse repo) remains at 7% post the review. This was in line with the general market expectation.

But, there was some liquidity enhancement measures undertaken by the central bank. The RBI cut the statutory liquidity ratio (SLR) of scheduled commercial banks from 24% to 23% of their deposits with effect from mid August. The SLR is the percentage of total deposits that banks need to invest in the government bonds. The reduction will help in the flow of credit through the system. The 1% cut, based on the total deposits in the country will help inject around Rs 620 bn of liquidity into the system. However, credit offtake has been muted, and doesnit seem to be really taking off anytime soon. Thus this liquidity cushion can only be used over a course of time. Although the liquidity conditions have eased significantly in recent times, the RBI felt it was necessary to ensure that such pressures do not constrain flow of credit to productive sectors of the economy. What has also been worrying the RBI is the gap between credit and deposit growth, which could eventually choke credit flow in the system.

A rate cut at this juncture would increase inflationary pressure in the economy rather than propel growth. The RBI expects the below par monsoons this year to have a negative impact on food inflation. In April the RBI had made a baseline projection of Wholesale Price Index (WPI) inflation for March 2013 of 6.5%. However this was assuming a normal monsoon. Headline inflation continues to remain sticky, above 7%, on account of an increase in food prices, input costs, and upward revision in prices of certain administered items such as coal. Now keeping with the current trends, the central bank has raised its WPI inflation forecast to 7% for March 2013. Plus, seeing the deficient monsoon, slowing industrial activity, and weak overseas recovery, the RBI has moderated its GDP growth projections for FY13 to 6.5% from 7.3% earlier.

Going forward...

The primary focus of monetary policy this time was on inflation control in order to secure a sustainable growth path for India over the medium-term. The RBI has upped its inflation guidance and moderated its growth target for the country. This shows that things may not get better any time soon. Overall economic activity remains subdued and credit off take remains muted. The deficient monsoons are currently a major risk factor towards growth and inflation. All in all, we do not see the SLR cut as a masterstroke for tackling the tricky balance of inflation and growth rate.

Equitymaster requests your view! Post a comment on "Monetary Policy: Will SLR cut do the trick?". Click here!

  

More Views on News

IDFC Bank: One-Off Trading Loss, Expansion Pull Down Profits (Quarterly Results Update - Detailed)

Feb 8, 2018

IDFC Bank's profits hit by trading loss and higher investments to build network.

Axis Bank: Lower Slippages Save Bottomline Performance (Quarterly Results Update - Detailed)

Feb 6, 2018

Lower provisioning leads to the net profits growing by 25% during the quarter. However, asset quality remains a concern and would be the key thing to watch out for in the coming quarters results.

HDFC Bank: Loan Growth Camouflages Bad Loan Risks (Quarterly Results Update - Detailed)

Jan 22, 2018

The bank delivers a consistent performance with net profits growing by 20%. However, bad loans have risen considerably and would be the key things to watch out for going forward.

Should You Take SBI Chief's Advice and Load up on SBI Shares? (The 5 Minute Wrapup)

Jul 6, 2017

Does the stock score on the value versus price equation?

Why We Skipped This 70% Gainer (The 5 Minute Wrapup)

May 18, 2017

Underreporting of bad loans by some private sector banks casts a cloud over the sector's clean image so far.

More Views on News

Most Popular

Here's What You Should Do in this Market Crash(The 5 Minute Wrapup)

Feb 6, 2018

The market correction has provided a golden opportunity to buy five high-quality safe stocks.

As the Market Corrects... It's Time to Buy More(Smart Contrarian)

Feb 5, 2018

The recent sell off in the stock market offers buying opportunity in some quality small caps.

The Era of Easy Money is Coming to an End. What Happens Now?(Vivek Kaul's Diary)

Feb 9, 2018

The easy money policy of the Federal Reserve of the United States, which drove up stock markets all over the world, is ending, with the Federal Reserve looking to shrink its balance sheet.

When Small is Not Always Beautiful(Chart Of The Day)

Feb 6, 2018

Big companies enjoying tax deductions and exemptions have an edge over the small companies.

What Should Mutual Fund Investors Do After LTCG Tax Norms(Outside View)

Feb 6, 2018

PersonalFN explain what investors should after LTCG tax norms.

More

Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE BANKEX


Feb 16, 2018 (Close)

MARKET STATS