India Econ Flash

India Econ Flash
RBI's Booster Dose: CRR, Repo and SLR cuts + Liquidity
Infusion...Expect Policy Makers To Remain Active
➤ RBI's Post Diwali Bonanza: Barely a week after its mid-term policy where
everything was status-quo, over the week-end the RBI cut the CRR by 100bps to
5.5%, the repo rate by 50bps to 7.5% and made the 100bps 'de-facto SLR
reduction' to 24% permanent. (With this move, the CRR has been cut by 350bps
from 9% to 5.5% while the repo has been cut by 150bps from 9% to 7.5%.) The
RBI also announced various liquidity injection measures. These include:
(1) Introduction of a special re-finance facility for banks up to 1% of their
NDTL for a period of 90days
(2) Extension of liquidity support to mutual funds and NBFCs by allowing
banks to avail liquidity support up to 1.5% of their NDTL from 0.5% earlier.
(3) Proposed buy-back of MSS securities (Amount o/s under the MSS - i.e
securities issued to mop up excess capital inflows - is Rs1,651bn or US$33bn.)
The total liquidity injection from the weekend's move works out to Rs1,200bn
(US$24bn), i.e. Rs400bn via the CRR cut and Rs400bn each via the refinance
facility and extension of liquidity support to MFs/NBFCs. (see pg3)
➤ What changed in a week?
(1) FX reserves were down US$15.5bn in the week ending Oct 24, taking the
fiscal YTD drop to US$51.3bn. This is a result of continued intervention, higher
trade deficit, portfolio outflows, revaluation and demand from Indian corporates
to meet overseas requirements - given that overseas markets have dried up.
(2) System being liquidity short again. Overnight call money rates rose to a
high of 21% with the RBI injecting Rs656bn(US$13bn) via the LAF window.
This is a result of RBI's fx intervention (i.e. when RBI sell dollars, it sucks out
INR liquidity) as well as demand from corporates which were redeeming some
of their investments in mutual funds and using the proceeds to buy dollars to
meet their overseas requirements
(3) WPI Inflation was down to 10.68% for the week ending Oct18 - marking a
5th consecutive week of decline from its peak of 12.9% seen on Aug2. Given the
sharp decline in commodity prices resulting in an adjustment in prices of ATF,
naphta and furnace oil, we expect inflation to fall to single digits shortly
➤ Implications - Positive, Can one expect more? Yes: This week-end’s package
is positive for sure. While globally things have begun improving, risk appetite
may take awhile to normalise and thus one could expect continued RBI
intervention. This coupled with the not so encouraging sales over the festive
period and the near halving of non-bank sources of funds (see pg 2), makes the
likelihood of further CRR/SLR/Repo cuts inevitable. To boost dollar liquidity,
one could expect further easing of the capital account norms, a possibility of an
NRI deposit scheme as well as examining the possibility of accessing temporary
dollar liquidity support from international institutions.