Rbi May Defer Bank Rate Cut

The Reserve Bank of India (RBI) may defer cutting its prescribed cash reserve ratio (CRR) for banks and its Bank Rate, or discount rate, ICICI Securities and Finance Company Ltd (I-Sec) said.

The I-Sec Indian debt markets update for the first fortnight of February said bank credit-offtake had picked up. In absolute terms, bank credit (excluding banks investments in CPs, bonds and debentures) to commercial sector has increased by Rs 15,669 crore between December 19 and January 30, the report said.

It attributed the pick-up partially to drawals by corporates to cash in on high treasury bills yields during the call crisis, but said genuine demand would still contribute a substantial chunk of the reported rise in credit, the report said. Besides partial replacement of corporate foreign currency borrowings by rupee borrowings was also a reason for increased off-take, I-Sec said.

 

RBIs reaction to the unfolding macro-economic parameters was of crucial importance, the report said.

A CRR cut of 0.5 per cent to 10 per cent will be easily absorbed by strong industrial demand which will also keep the rupee well bid, maintaining a fairly stable exchange rate, the report said.

Alternatively, the RBI could defer CRR or bank rate cuts till end March or April to ensure successful completion of at least a part of the huge gross borrowing programme of Rs 70,000 crore for the next financial year, the report said.

A cut in the CRR or bank rate might cause a temporary dip in interest rates which should provide an opportunity for market participants to either shorten the duration of their portfolios or to book profits on their securities portfolio, the report said.

According to the report, RBI is unlikely to reverse its rupee support measures until the end of the elections, and the uncertainty associated with them, I-Sec said in a report yesterday

The surplus liquidity in the overnight markets has resulted in an increasing subscription to the nine per cent fixed rate daily repos conducted by the central bank, I-Sec said.

This is also a clear indication that overnight rates would come crashing down if the apex bank were to withdraw the fixed rate repos to change them back to the auction system, it added.Overnight rates broadly ruled between 9-11 per cent for the fortnight, the report said.

However, there has been a substantial rise in banks surplus funds, putting a downward pressure on call money rates, it added.

The increase in rupee liquidity has been primarily on account of strong coupon inflows of Rs 2,000 crore over the past four weeks and the net treasury bill redemptions to the extent of Rs 2,500 crore, the report said.

The net inflow of nearly Rs 4,500 crore neutralises the impact of the 0.5 per cent CRR cut as well as the reduction in general and export refinance facilities announced on January 16, the report said.