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50 Basis Points Cut in SLR is Symbolic: Deven Choksey
03 Feb 2015, 12:37 PM IST 
Mumbai: The Reserve Bank of India (RBI) held interest rates steady at 7.75 per cent on Tuesday after easing monetary policy just three weeks ago, leaving its next move probably until after the government presents its annual budget at the end of this month.
Instead, the Reserve Bank of India cut the statutory liquidity ratio (SLR) - or the amount of bonds that lenders must set aside - by 50 basis points to 21.5 per cent of deposits from the two-week cycle starting on Feb. 7 in a bid to spur banks to inject more credit into the economy.
KEY POINTS:
*RBI keeps repo rate unchanged at 7.75 per cent, reverse repo rate at 6.75 per cent
*RBI cuts banks' SLR by 50 basis points to 21.5 per cent of total deposits from fortnight starting February 7
*Says appropriate to maintain current interest rate stance and wait given that no substantial new developments on disinflationary process or on fiscal outlook
*Says heightened volatility in global financial markets including through exchange rate channel constitute significant risk to inflation assessment
*Says inflation likely to be around target level of 6 per cent by Jan 2016
COMMENTARY:
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI:
"The RBI had made clear in its previous policy statement that the next move will be dependent on the quality of fiscal consolidation. So the next cut will be only post the budget.
"I expect front loading of rate cuts to continue with another 50 basis points of cuts to be delivered before June 2015. A cut after the budget will be a boost to the overall sentiment if the budget announces some good investment plans.
"Post June, there will again be a pause on rates as there will be a clearer picture on the growth front by then. Hence, the RBI will rather try to focus on bringing inflation down to its 6 per cent target."
U.R. BHAT, MANAGING DIRECTOR AT DALTON CAPITAL, MUMBAI:
"The Reserve Bank of India has taken a stance for the budget. If the government is pursuing the fiscal consolidation path properly, then we can expect more easing soon.
"The SLR cut is insignificant as most banks hold heavy quantity in SLR as there are no significant lending opportunities. The RBI can ease 25 basis points once in every 3-4 months and a total of 100 basis points over the next fiscal year."
DEVENDRA KUMAR PANT, CHIEF ECONOMIST AND SENIOR DIRECTOR AT INDIA RATINGS & RESEARCH:
"On the whole, the data is as per expectations. The cut in SLR by 50 basis points is not a very effective tool, but it's good sentiment-wise as this would give assurance that the RBI is looking at liquidity.
"We expect 75 basis points cut in 2015/16. The first cut will more likely be after the budget, depending on how the fiscal consolidation path is laid out in the budget. The RBI will look into the feasibility of expenditure, calculation of oil and other subsidies."
SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK CAPITAL, MUMBAI:
"Today's move seems more practical and the future course of action would largely depend on how effectively the government is maintaining its fiscal deficit in the upcoming union budget.
"Though international crude prices have shown some volatility in recent days, we believe oil prices to remain favourable at least till the first half of coming fiscal year.
"Assuming the current economic scenario and a clarity over the fiscal consolidation plan, we believe the RBI to come up with one more 25 basis points rate cut any time between mid-March and next policy date of April 7, 2015."
RADHIKA RAO, ECONOMIST, DBS, SINGAPORE:
"The tone of the accompanying statements was dovish, but cautious, highlighting two aspects a) fiscal slippage ... b) an acknowledgement of the shift in global dynamics and undercurrents of a renewed push to depreciate currencies.
"This also reflects the RBI's disdain with quantitative easing programs (as ECB joined the bandwagon, just as the U.S. Fed bowed out) and the associated risks to financial stability and asset markets.
"We maintain our call for another 50 basis points cuts by the June quarter after the FY16 budget contents are sieved through."
DEVEN CHOKSEY, MANAGING DIRECTOR, KR CHOKSEY SECURITIES:
"I think the policy was more in line with the expectations. The 50 basis points cut in SLR is symbolic, but I think it is a positive move. This will provide additional liquidity for banks and will help banks to increase lending.
"We do expect the RBI will reduce the rates sooner, which will fuel growth in core sectors like infrastructure and manufacturing."
SANDEEP NANDA, CHIEF INVESTMENT OFFICER, BHARTI AXA LIFE INSURANCE, MUMBAI:
"By and large the policy has been on expected lines. Nobody was expecting a rate cut. The RBI wants to take a look at the government's numbers in the budget before thinking further. If current trends in commodity prices and India's fiscal deficit prevail, then one can expect another round of easing after the federal budget."
R. SIVAKUMAR, HEAD OF FIXED INCOME, AXIS ASSET MANAGEMENT:
"The rate action is more or less expected. We have also been expecting there will be some movement on SLR over a period of time.
"The interesting bit will be rule changes on Foreign Institutional Investors, which would have some impact on the corporate bond market. We continue to expect the RBI to cut another 50-75 basis points in this calendar year, and the current statement is fairly in line with its recent guidance."
MARKET REACTION:
*10-year benchmark bond yield gained 3 basis points (bps) to 7.68 per cent after RBI policy review
*Rupee trimmed gains to 61.76 per dollar, was at 61.67 before
*One-year overnight indexed swap rate gained 9 bps to 7.55 per cent after RBI holds rates steady - traders
BACKGROUND:
A Reuters poll of economists last week expected the central bank, having cut interest rates on Jan. 15, to keep its benchmark repo rate unchanged at 7.75 per cent at Tuesday's policy review.
Retail price inflation tumbled to 5 per cent in December, auguring well for the RBI's chances of achieving its target of 6 per cent by January 2016.
Analysts expect the central bank to cut rates by 100 basis points over the next 1-1/2 years.
The forecasters said future moves could depend on the government's annual budget in late February.
They expect Finance Minister Arun Jaitley to set a deficit target of 3.8 per cent of gross domestic product for fiscal 2015/16 during the budget, lower than this year's 4.1 per cent target.
Copyright @ Thomson Reuters 2015
