Motilal Oswal : In Line With The Trend

Motilal Oswal

CMD, Motilal Oswal Securities

The credit policy was in line with expectations, with the RBI marginally lowering the interest rates and also lowering its GDP forecast for FY03 from 6-6.5 per cent to 5-5.5 per cent.

It has cut the bank rate and the CRR by 25bp each to 6.25 per cent and 4.75 per cent respectively.

This is in line with the general trend and the earlier reiterations of the regulator to maintain its soft bias towards the interest rates. However, it might not lead to any significant changes from the bankers point of view.

While interest rates have been falling on a continuous basis, it has still not resulted in any substantial pickup in industrial credit.

 

The major beneficiaries of these lower rates have been the retail segment and the bond market players.

While RBI has been pressurising banks to pass on the benefits of lower rates to the industry, the banks have been very cautious on this front.

Even today, the PLR for banks is 10.5-11 per cent, with the middle and lower rated corporates being charged a premium over this rate.

On the CRR front, one wonders if this cut is going to make any impact on the system. Given the quantum of liquidity in the system and a consistent increase in the forex reserves, interest rates should remain low in the near future.

However, the major beneficiary of this liquidity and low rates remains the government itself, which has been able to lower its costs of borrowings significantly by over 200bp in the last 18 months.

Despite a substantial drop in interest rates, government-regulated savings rate still remains at very high levels.

An interest rate of eight per cent on RBI Relief Bonds and 9.5 per cent on EPF are not in sync with the ten year G-Sec yield of seven per cent.

While the RBI has done its part, now its time for other government-regulated rates to come down. During the last two years, as debt yields have consistently dropped, equity yields have consistently increased, making Indian equities more attractive than ever before.