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Saturday, 10 March 2012 00:00
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Pre-policy CRR cut of 75 bps raises hopes of rate cut

Given the tight liquidity in the market, and the likelihood of it getting much worse next week thanks to advance tax payments, a CRR cut on March 15 was pretty much par for the course, and most had put their money on a 50 bps cut—the fact that RBI Deputy Governor Subir Gokarn has also been talking of room for a CRR cut only strengthened this view. As per this narrative, no rate cut would be made in the March 15 mid-term review as the RBI would need clarity on whether the fiscal deficit will be cut—typically, the policy comes after the Budget on February 28, but the Budget got delayed due to the elections in 5 states. If RBI cut rates before the Budget, and government spending showed no signs of slowing, this would lead to an inflationary spiral once again.

By cutting CRR, and by a whopping 75 bps, RBI has surprised the market, leading to speculation that there may even be a small rate cut—25 bps—along with, possibly, another small cut in CRR on March 15. Thursday’s 75 bps CRR cut releases around R48,000 crore of liquidity into the market, taking the structural liquidity deficit to around R70,000 crore, a figure consistent with what RBI thinks is compatible with good transmission of monetary policy.

A rate cut, if it does happen, cannot in itself raise investment levels, but will certainly impact loans for housing, consumer durables and automobiles. Any real hike in investment levels will have to wait for the Budget since GDP growth cannot rise till investment levels do—even assuming the government is able to improve the corporate mood, investments cannot rise till savings do, else the current account deficit will get worse. And the only way to raise savings is to lower the public sector deficit, since it is the rising public sector deficit that has led to lowered savings rate in the country over the past few years. Even so, Thursday’s CRR cut is a positive boost to sentiments and raises hopes of the Budget being more pro-reform than most believe.

 

 

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