Wednesday, June 20, 2012


Maintains status quo as indicated in April policy…
No major announcement or indications on future stance were made as June policy is a mid-quarter review. Repo rate, CRR were kept unchanged as per their earlier indications but led to market disappointment as consensus of 25 bps cut in repo rate had been built aggressively in prices. 10 year Gsec yields also reacted negatively with new series rising 7 bps to 8.14%.

Extending some relief to exporters, there was an easing of the limit of export credit refinance from 15% to 50% of outstanding export credit of banks. This will release | 300 billion of liquidity, thought to be equivalent to a 50 bps CRR cut. However, the benefit will not flow to all banks equally but more to large export credit exposure banks. A CRR cut would have had a positive rub-off on all banks.

Under this refinance window, banks can borrow at repo rates under LAF as announced from time to time. Hence incremental borrowing cost on these funds will be lower by 100-150 bps. Refer Exhibit 3.

RBI has maintained its stance - inflation remains critical. It stated that… ‘Assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small.

Consequently, a further reduction in policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures.’ ‘Estimates suggest that real effective bank lending interest rates, though positive, remain comparatively lower than the levels seen during the high growth phase of 2003-08. This suggests that factors other than interest rates are contributing more significantly to the growth slowdown.’

We expect the RBI to make major policy announcements in its July policy meet with respect to revised GDP growth and inflation projections along with change in policy interest rates, if any.

Monetary/Liquidity Measures Announced
 No change in cash reserve ratio (CRR) of scheduled banks at 4.75% of their NDTL

 Policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0%

 The reverse repo rate remains unchanged at 7%, and MSF rate and the Bank Rate at 9%

For augmenting liquidity and increase credit flow to the export sector, RBI increased the limit of export credit refinance from 15% of outstanding export credit of banks to 50%, potentially releasing additional liquidity of over Rs.300 billion, equivalent to about 50bps reduction in the CRR.