Monetary policy: Liquidity without rate cut - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


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

Monetary policy: Liquidity without rate cut

Oct 30, 2012

Trust the Reserve Bank of India (RBI) to do what it does best. Stick to its convictions. Governor Dr Subbarao did little to bow down to the government's demand on lowering interest rates (repo rate). The 0.25% cut in cash reserve ratio (CRR), however, will free up liquidity to the tune of Rs 175 bn. Readers would recall that some top banking sector executives had complained about the unproductivity of the CRR.. Especially because the same is non interest yielding for banks. Plus it blocked essential liquidity for the banking system at a time when the sector is targeting to lend at cheaper rates. More so to boost corporate capex and investment in key infrastructure. Hence the CRR cut is certainly well timed.

The Finance Minister however has not minced words about the government 'walking alone' in its pursuit to revive the economy. After all, even the last minute attempt at drawing a fiscal roadmap was meant to please the RBI. But the RBI is not one to get swayed by these 'paper targets'. Especially given the government's shoddy track record in bringing down deficits.

A final shove to reform initiatives?

One of the main purposes of the CRR cut, as articulated by the policy statement, is to reinforce the positive impact of government policy actions on growth. The RBI's own statistics show that accretion to corporate order book and industrial production has slowed down dramatically in the past few months. Liquidity is not the only reason for the poor appetite amongst corporate to invest in their businesses. Policy logjam and infrastructure bottlenecks have had a much bigger role to play. Nevertheless, the RBI did give the final push to the recent reform initiatives to help accelerate GDP growth. From 9.2 % YoY in 4QFY11 to 5.5% YoY in 1QFY13, India's GDP growth rate has already shrunk good 3.7% in the past 15 months.

Asset quality concerns

Rating agencies and business papers have already done a good job of highlighting Indian banking system's 'asset restructuring' fiasco. The RBI is therefore also skeptical about Indian banks lending indiscriminately at lower interest rates under the garb of higher credit disbursement. That too without taking care of the quality of outstanding exposures. That seems to be another reason why the RBI is in no hurry to lower interest rates.

Inflation problem far from getting solved

While yielding to the need for additional liquidity, the RBI has not lost sight of sticky inflation. Fuel prices in particular remains on the RBI's watchlist. And the central bank sees little reason to go easy on inflation control. In fact, the RBI believes that growth risks have risen to such an extent that they could well overwhelm the positive effects of enhanced liquidity. Moreover, notwithstanding some muted softening recently, commodity prices are still at elevated levels. Consequently, there is a significant risk of liquidity-driven price increases.

What to expect?

While we do not see the CRR cut to hasten the softening of interest rates in the banking sector, it may offer some additional capital headroom. This means banks including those that are not very well capitalized may manage to meet the RBI's credit growth targets for the fiscal. Having said that, the RBI's mandate on priority sector lending and concern on asset quality will ensure that credit growth and profitability remain subdued in the medium term. Needless to say, the CRR cut is unlikely to have any meaningful impact on FY13 GDP growth rate.

Tanushree Banerjee

Tanushree Banerjee (Research Analyst), is the editor of Stock Select and, ValuePro Equitymaster's oldest recommendation services. She is also the editor of Equitymaster's most popular newsletter read by over 300,000 subscribers, The 5 Minute WrapUp. Tanushree started her career at Equitymaster covering the banking and financial sector stocks and scrutinising RBI policies. Over the last decade, she developed Equitymaster's research processes that helped us pick out various multibaggers, across all sectors. A firm believer of "safety first" when it comes to investing, Tanushree closely follows the investing philosophies of Warren Buffett, Jeremy Grantham, and Joel Greenblatt.

Equitymaster requests your view! Post a comment on "Monetary policy: Liquidity without rate cut". Click here!

1 Responses to "Monetary policy: Liquidity without rate cut"

K Subramanian

Dec 2, 2012

RBI should take the cue from the government and 'walk the extra mile'. RBI should consider interest rate cut and help government put through the reforms.........!

Equitymaster requests your view! Post a comment on "Monetary policy: Liquidity without rate cut". Click here!

More Views on News

How the YES Bank Collapse Unfolded - 10 Points (Sector Info)

Mar 9, 2020

A timeline of how YES Bank went from a stock market darling to a pariah.

Today's Stock Market Crash: 10 Points (Sector Info)

Mar 6, 2020

Top factors that dragged the markets lower today.

More Views on News

Most Popular

Why Gold Hit Lower Circuit (Fast Profits Daily)

Jan 11, 2021

Were you shocked that bullion prices hit lower circuits on Friday on the MCX? Find out why it happened...

Time to Book Profits in Pharma Stocks (Fast Profits Daily)

Jan 15, 2021

In this video, I'll show you why it might be the right time to take money of the table in pharma stocks.

A Rare Chance to Invest in Potential Multibaggers in 2021 (Profit Hunter)

Jan 11, 2021

Our ace stock picker is ready to capitalise on a big growth opportunity.

Smallcap Stocks: Your Best Bet for 2021 and Beyond (Profit Hunter)

Jan 15, 2021

The pandemic failed to thwart Richa's investing success formula for 2020.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms


Jan 22, 2021 (Close)