www.thesuniljain.com

RBI must increase liquidity, wait to raise repo rates PDF Print E-mail
Tuesday, 05 June 2018 04:55
AddThis Social Bookmark Button

Shobhana edit

 

While rising inflation could prompt RBI to harden its stance post the monetary policy review on Wednesday, even if it doesn’t actually hike the repo, what the central bank must do is reassure the bond markets of adequate liquidity. The markets have been selling off on inflation worries in the wake of rising crude oil prices and possible crop support schemes that could drive up prices of food. Moreover, the large hits to their bond portfolios, thanks to the sharp 140 basis points jump in the yield between August 2017 and now, has made them nervous. To that extent, an increase in the repo of 50 bps over the course of 2018 has probably been priced in.

Although the repo has not been raised, banks have been raising interest rates on loans for a few months now; since March, the State Bank of India has upped its marginal cost of funds lending rate by 30 bps, to the current level of 8.25%, with the latest rise coming last Friday. This is because deposits have been growing sluggishly and systemic liquidity is not always adequate. Banks can’t be blamed because, while liquidity currently is in surplus at around Rs 30,000 crore, till a few weeks back—until May 24—it was in deficit. This is partly because currency-in-circulation has been relatively high and once sowing operations start, the liquidity could fall.

 

 

Equally, deposits have been growing at a sluggish pace—averaging 7% over the past couple of months—forcing banks to raise rates to ensure they are able to cater for loan demand which has been growing at a more brisk 10-11%. To enhance liquidity, RBI needs to conduct more open market operations (OMOs); it has bought back securities worth nearly Rs 11,000 crore between early February and late May. In the meanwhile, however, banks have also bought securities at the auctions.

Economists suggest the government could start buying back gilts worth Rs 71,900 crore as it had said it would. Also, while there are those that fear it might send out the wrong signals, some economists recommend an NRI bond issuance for around $30 billion to bring in the necessary liquidity. Unless interest rates cool, or at least stay put, the nascent recovery in the economy could be in jeopardy; capacity utilisation has actually been falling instead of rising.

A 10-20 bps hike in loan rates might appear small in absolute terms, but will hurt smaller companies at a time when commodity prices are pinching. Loan growth, while rising, remains well below the long-term average, even though loan rates, on average, are at their lowest in four years.

While it is true that India’s policy is inflation-targeting , the policy needs to be more flexible because food prices are decided more by supply-side factors. To be sure, core inflation has risen over the last couple of months, there has been a slight fiscal slippage in FY18, crude oil prices remain elevated and there is a general tightening of monetary policy in several countries.

But, given the good monsoon forecast, RBI might want to wait to gauge the inflationary pressures of the proposed crop price support scheme. Keep in mind, it was just in April that RBI had to slash its H1FY19 projections by 40-50 bps. Right now, growth should get top priority, especially since the recovery is weak and not enough jobs are being created.

 

 

You are here  : Home
intalk.eu - This website is for sale! - intalk Resources and Information.