CP rollovers hint at improving liquidity, bring relief for NBFCs

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RBI holds rates, but hints at future easing

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Economic growth slowed in the second quarter to 7.1 per cent owing to the credit squeeze.
Mumbai: The Reserve Bank of India left interest rates and monetary policy stance unchanged but lowered retail price forecast, kindling hopes of a rate cut if inflation stays benign.

It may be months before the monetary policy committee (MPC) actually cuts rates and RBI governor Urjit Patel said it is not changing the monetary policy stance of ‘calibrated tightening’ since growth is expected to remain healthy for the rest of the year.
“If the upside risks we have flagged do not materialise, or are muted in their impact in incoming data, there is a possibility of space opening for commensurate policy action by MPC,” Patel told reporters. “MPC is of the view that incoming data will ascertain the durable nature of inflation softening and allow better judge- ment on future policy action. Hence, given the assessment that growth is likely to remain healthy for the rest of the year, MPC retains its stance at ‘calibrated tightening’ so as to buy time to pause, reflect and undertake future policy action with more robust inflation signals.”

The central bank lowered inflation forecast for the second straight time on Wednesday, projecting a rate of 2.7-3.2 per cent in the second half, from the 3.9-4.5 per cent forecast during the previous policy meet.

For the first half of FY20, inflation is projected at 3.8-4.2 per cent, with risks tilted to the upside.

Since October, global crude oil prices have slumped about 30 per cent, reducing India’s oil import bill and bringing down domestic fuel prices. The benchmark bond yield has dipped 50 basis points since then. The Federal Reserve, too, is seen restraining the pace of rate increases next year as growth in US slows. Retail inflation, as measured by the Consumer Price Index, was at 3.31 per cent in October, compared with 3.7 per cent in September.

The central bank also ruled out any special liquidity window for non-banking finance companies, saying the liquidity situation has been managed to reflect normal market conditions. However, the regulator promised to act if the situation goes out of hand, which appears remote at this point.
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Beginning April, retail consumers and promoters of small and medium enterprises will have their floating rate borrowing linked to one of the four benchmarks which includes the yield on 91-day treasury bills and the spread will remain constant till the loan winds down.

RBI also announced a road map for lowering statutory liquidity ratio by 150 basis points with a 25-basis points cut every quarter, a move that would make more than Rs 1 lakh crore of funds available for lending.

Repo rate, the rate at which the central bank lends to banks, was kept at 6.5 per cent. All other ratios, including the cash reserve ratio — the proportion of deposits that banks keep with the central bank — were maintained at existing levels.

An ET poll of 23 market participants did not expect any rate cut, but said MPC could suggest some policy measures to ease liquidity pressure.

All six members of MPC voted for a pause while Ravindra Dholakia voted for a change in policy stance to ‘neutral’ from ‘calibrated tightening’.
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“Given the downside risks to growth, some more members could tilt towards a change in stance by the next meeting in February,” said Abheek Barua, economist at HDFC Bank. “Governor Urjit Patel also hinted that the conditions are gradually changing and they await more robust inflation signals to consider any change in policy.”

Bonds rallied 0.13 basis points to end at 7.44 per cent, the lowest yield since April 13. The rupee fell 0.05 per cent to 70.46 to a dollar. The Sensex declined 0.69 per cent to end at 35,884.41 points.

Economic growth outlook has been maintained at 7.4 per cent despite slow consumption demand in a market where liquidity has been tight and cost of funding has risen for the non-banking finance sector.

“The acceleration in investment activity bodes well for mediumterm growth potential of the economy,” said Patel. “The time is apposite to further strengthen domestic macroeconomic fundamentals.”

Economic growth slowed in the second quarter to 7.1 per cent owing to the credit squeeze.

While slowing growth may not be a worry yet, RBI said there is sufficient liquidity in the banking system with the overnight call money rate hovering close to the policy rate.

“The Reserve Bank is guided by and large by the principle of addressing system-wide liquidity,” said deputy governor Viral Acharya. “RBI also stands ready to be the lender of last resort, but that is provided conditions warrant that sort of an extreme measure.”

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