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After CRR hike, will the RBI cut interest rates in December?

Here is what top research houses and brokerages expect

Puneet Wadhwa  |  New Delhi 

Photo: Kamlesh Pednekar
Photo: Kamlesh Pednekar

The Reserve Bank of India (RBI) imposed a temporary cash reserve ratio (CRR) over the weekend, on the incremental rise in bank deposits following the government’s demonetisation move. The measure, which will be reviewed on December 9 and was largely expected by analysts, aims to suck out excess liquidity in the system; though banks will not be able to earn any income on these deposits.

Also Read: Banks can't cut lending rates as much as expected

Given this development and the ongoing clampdown on black money via the demonetisation route, will the cut interest rates in its upcoming monetary policy review in December? Here is what top research houses and brokerages expect.

HSBC

With the move, the has bought itself room to suck out about Rs 10.2 trillion, or Rs 10.2 lakh crore (Rs 3.2-lakh crore via incremental and Rs 7-lakh crore via using government bonds) from the banking system. As per our calculations, this should suffice for now, but if additional need arises, the can resort to additional measures like issuing special bonds.

Also Read: Market not pricing disruption beyond 2-4 weeks: Gautam Chhaochharia

If the believes than lending rates need to fall over time, in order to support growth and recovery, (especially given some growth drag following demonetisation), cutting the may provide a nudge. We are expecting a cut in the December 09 policy meeting.

BANK OF AMERICA-MERRILL LYNCH

We expect the to cut policy rates by 25 bps on December 7 (and April) as the conversion of black money into deposits should allow banks to cut lending rates even in October - March busy industrial season. In out view, the case for a rate cut grows more complelling. We see further 30bps risk each to our 7.4% FY17 and 7.6% FY18 groqth forecasts with demonetisation to hurt activity in December as well.

CRISIL

The immediate impact hike in will cause liquidity to tighten and send bond yields on a northward blip. However, more liquidity is expected to make way into the banking system in the coming days in the aftermath of demonetisation, which will ease the pressure on yields. Also, the move, as the said, is ‘purely temporary’ and will be reviewed over the coming fortnight.

The other impact is on transmission. Banks could delay cutting their lending rates given that they have promised at least 3-4% to savings account depositors, but will be not be receiving any interest on the deposits impounded for CRR.

Also Read: Banks slide on deposit move

Since the last monetary policy review in October, the downside risks to growth have risen and that to inflation have subsided. The fall in the value of rupee could exert some upward pressure on the imported component of inflation. We believe the odds are in favour of a 25 bps cut to 6%.

CARE RATINGS

The expectation so far has been that the will lower the aggressively in the December policy by 50 bps. This may be deferred till stability is achieved in the system. Depending on further action or announcements in the period running up to the policy, our expectation on rates would be moulded.

ICICI SECURITIES

In terms of the monetary policy signals, we do not believe any strong inferences are to be drawn from a cut in CRR. After all, the itself expects the recourse to this measure to be temporary. We retain our assumption that will cut the benchmark by 25bps to 6%, while highlighting the downside risks to its growth projections. is unlikely to force pedal to the metal thereafter in our view even as the scale and durability of the negative growth shock is still to be known. 

Our underlying assumption is that Government is more likely to boost its expenditures, helped by the potential distribution of substantially higher dividend from the RBI, even as the quantum as well as the mechanics of distribution is far from certain at this stage.

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After CRR hike, will the RBI cut interest rates in December?

Here is what top research houses and brokerages expect

Here is what top research houses and brokerages expect
The Reserve Bank of India (RBI) imposed a temporary cash reserve ratio (CRR) over the weekend, on the incremental rise in bank deposits following the government’s demonetisation move. The measure, which will be reviewed on December 9 and was largely expected by analysts, aims to suck out excess liquidity in the system; though banks will not be able to earn any income on these deposits.

Also Read: Banks can't cut lending rates as much as expected

Given this development and the ongoing clampdown on black money via the demonetisation route, will the cut interest rates in its upcoming monetary policy review in December? Here is what top research houses and brokerages expect.

HSBC

With the move, the has bought itself room to suck out about Rs 10.2 trillion, or Rs 10.2 lakh crore (Rs 3.2-lakh crore via incremental and Rs 7-lakh crore via using government bonds) from the banking system. As per our calculations, this should suffice for now, but if additional need arises, the can resort to additional measures like issuing special bonds.

Also Read: Market not pricing disruption beyond 2-4 weeks: Gautam Chhaochharia

If the believes than lending rates need to fall over time, in order to support growth and recovery, (especially given some growth drag following demonetisation), cutting the may provide a nudge. We are expecting a cut in the December 09 policy meeting.

BANK OF AMERICA-MERRILL LYNCH

We expect the to cut policy rates by 25 bps on December 7 (and April) as the conversion of black money into deposits should allow banks to cut lending rates even in October - March busy industrial season. In out view, the case for a rate cut grows more complelling. We see further 30bps risk each to our 7.4% FY17 and 7.6% FY18 groqth forecasts with demonetisation to hurt activity in December as well.

CRISIL

The immediate impact hike in will cause liquidity to tighten and send bond yields on a northward blip. However, more liquidity is expected to make way into the banking system in the coming days in the aftermath of demonetisation, which will ease the pressure on yields. Also, the move, as the said, is ‘purely temporary’ and will be reviewed over the coming fortnight.

The other impact is on transmission. Banks could delay cutting their lending rates given that they have promised at least 3-4% to savings account depositors, but will be not be receiving any interest on the deposits impounded for CRR.

Also Read: Banks slide on deposit move

Since the last monetary policy review in October, the downside risks to growth have risen and that to inflation have subsided. The fall in the value of rupee could exert some upward pressure on the imported component of inflation. We believe the odds are in favour of a 25 bps cut to 6%.

CARE RATINGS

The expectation so far has been that the will lower the aggressively in the December policy by 50 bps. This may be deferred till stability is achieved in the system. Depending on further action or announcements in the period running up to the policy, our expectation on rates would be moulded.

ICICI SECURITIES

In terms of the monetary policy signals, we do not believe any strong inferences are to be drawn from a cut in CRR. After all, the itself expects the recourse to this measure to be temporary. We retain our assumption that will cut the benchmark by 25bps to 6%, while highlighting the downside risks to its growth projections. is unlikely to force pedal to the metal thereafter in our view even as the scale and durability of the negative growth shock is still to be known. 

Our underlying assumption is that Government is more likely to boost its expenditures, helped by the potential distribution of substantially higher dividend from the RBI, even as the quantum as well as the mechanics of distribution is far from certain at this stage.
image
Business Standard
177 22

After CRR hike, will the RBI cut interest rates in December?

Here is what top research houses and brokerages expect

The Reserve Bank of India (RBI) imposed a temporary cash reserve ratio (CRR) over the weekend, on the incremental rise in bank deposits following the government’s demonetisation move. The measure, which will be reviewed on December 9 and was largely expected by analysts, aims to suck out excess liquidity in the system; though banks will not be able to earn any income on these deposits.

Also Read: Banks can't cut lending rates as much as expected

Given this development and the ongoing clampdown on black money via the demonetisation route, will the cut interest rates in its upcoming monetary policy review in December? Here is what top research houses and brokerages expect.

HSBC

With the move, the has bought itself room to suck out about Rs 10.2 trillion, or Rs 10.2 lakh crore (Rs 3.2-lakh crore via incremental and Rs 7-lakh crore via using government bonds) from the banking system. As per our calculations, this should suffice for now, but if additional need arises, the can resort to additional measures like issuing special bonds.

Also Read: Market not pricing disruption beyond 2-4 weeks: Gautam Chhaochharia

If the believes than lending rates need to fall over time, in order to support growth and recovery, (especially given some growth drag following demonetisation), cutting the may provide a nudge. We are expecting a cut in the December 09 policy meeting.

BANK OF AMERICA-MERRILL LYNCH

We expect the to cut policy rates by 25 bps on December 7 (and April) as the conversion of black money into deposits should allow banks to cut lending rates even in October - March busy industrial season. In out view, the case for a rate cut grows more complelling. We see further 30bps risk each to our 7.4% FY17 and 7.6% FY18 groqth forecasts with demonetisation to hurt activity in December as well.

CRISIL

The immediate impact hike in will cause liquidity to tighten and send bond yields on a northward blip. However, more liquidity is expected to make way into the banking system in the coming days in the aftermath of demonetisation, which will ease the pressure on yields. Also, the move, as the said, is ‘purely temporary’ and will be reviewed over the coming fortnight.

The other impact is on transmission. Banks could delay cutting their lending rates given that they have promised at least 3-4% to savings account depositors, but will be not be receiving any interest on the deposits impounded for CRR.

Also Read: Banks slide on deposit move

Since the last monetary policy review in October, the downside risks to growth have risen and that to inflation have subsided. The fall in the value of rupee could exert some upward pressure on the imported component of inflation. We believe the odds are in favour of a 25 bps cut to 6%.

CARE RATINGS

The expectation so far has been that the will lower the aggressively in the December policy by 50 bps. This may be deferred till stability is achieved in the system. Depending on further action or announcements in the period running up to the policy, our expectation on rates would be moulded.

ICICI SECURITIES

In terms of the monetary policy signals, we do not believe any strong inferences are to be drawn from a cut in CRR. After all, the itself expects the recourse to this measure to be temporary. We retain our assumption that will cut the benchmark by 25bps to 6%, while highlighting the downside risks to its growth projections. is unlikely to force pedal to the metal thereafter in our view even as the scale and durability of the negative growth shock is still to be known. 

Our underlying assumption is that Government is more likely to boost its expenditures, helped by the potential distribution of substantially higher dividend from the RBI, even as the quantum as well as the mechanics of distribution is far from certain at this stage.

image
Business Standard
177 22

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