ExpertSpeak: Shishir Asthana, an independent investment banker
There are two surprises with regard the sharp reduction in the cash reserve ratio ( CRR) announced by the central bank. The first is the timing and the second is the quantum.
The facts that the CRR has been cut by 75 basis points within two months of announcing a 50-basis-point drop in January 2012 and that it has been reduced just a few days ahead of the Reserve Bank of India (RBI)’s credit policy review raise questions on the urgency of the announcement.
That banks were facing a severe liquidity crisis can be seen from the tightness in the liquidity deficit, which touched almost Rs2 lakh crore or 4% of the net demand and time liability (NDTL) against a comfort zone of around 1%. With the date for advance tax payment looming ahead on March 15, 2012, the central bank expected further tightening of liquidity, which could have been unmanageable as was seen by the rising overnight call money rates.
The repeated measures taken by the RBI since December 1, 2011 have failed to bring in liquidity in the banking system. A series of open market operations of over Rs1 lakh crore and the 50-basis-point CRR cut in January 2012, which pumped in nearly Rs30,000 crore of liquidity, have failed to bridge the deficit.
Part of the reason for liquidity being sucked out of the system is the central bank’s intervention in the foreign exchange (forex) market to control the falling rupee. It has been reported that the RBI has pumped in $15.5 billion (Rs75,000 crore) to prevent the rupee from falling further. The other reason was the elections. Historically liquidity shifts from banks to the hand of the public during election time which was also visible this time when Rs1,500 billion of liquidity was sucked out of the money market.
These reasons have perhaps led the central bank to announce a higher than expected cut of 75 basis points that will bring in Rs48,000 crore back in the system. This will give excess money in the hands of banks which can be used to deploy in higher yielding assets and to improve their net interest margins.
There is no doubt that the move will result in a rise of stock prices of the banks, but is it sustainable?
The key figures to watch will be the liquidity deficit as a percentage of NDTL and the 10-year bond yield. Bonds closed at 8.28% on Friday (ie March 9, 2012) and may remain below 8.20% levels for some days. The market is building in hopes that liquidity will come back to normal levels post-April, when the advance tax money would enter the system again and liquidity deficit can again be near the comfort zone of 1% of the NDTL.
The only problem in the story is the rupee, which can go for a toss if crude oil plays spoil sport. Given the current sound bites from the Middle East it does look that crude oil could disturb the central bank’s planning.
It is thus very unlikely that the RBI would like to bring down its repo rates as the economy still has the unabsorbed inflation from petrol, diesel and LPG under pricing.
The only way out of this situation would be to resume the growth path. The ball is once again in the finance minister’s court.
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There are two surprises with regard the sharp reduction in the cash reserve ratio ( CRR) announced by the central bank. The first is the timing and the second is the quantum.
The facts that the CRR has been cut by 75 basis points within two months of announcing a 50-basis-point drop in January 2012 and that it has been reduced just a few days ahead of the Reserve Bank of India (RBI)’s credit policy review raise questions on the urgency of the announcement.
That banks were facing a severe liquidity crisis can be seen from the tightness in the liquidity deficit, which touched almost Rs2 lakh crore or 4% of the net demand and time liability (NDTL) against a comfort zone of around 1%. With the date for advance tax payment looming ahead on March 15, 2012, the central bank expected further tightening of liquidity, which could have been unmanageable as was seen by the rising overnight call money rates.
The repeated measures taken by the RBI since December 1, 2011 have failed to bring in liquidity in the banking system. A series of open market operations of over Rs1 lakh crore and the 50-basis-point CRR cut in January 2012, which pumped in nearly Rs30,000 crore of liquidity, have failed to bridge the deficit.
Part of the reason for liquidity being sucked out of the system is the central bank’s intervention in the foreign exchange (forex) market to control the falling rupee. It has been reported that the RBI has pumped in $15.5 billion (Rs75,000 crore) to prevent the rupee from falling further. The other reason was the elections. Historically liquidity shifts from banks to the hand of the public during election time which was also visible this time when Rs1,500 billion of liquidity was sucked out of the money market.
These reasons have perhaps led the central bank to announce a higher than expected cut of 75 basis points that will bring in Rs48,000 crore back in the system. This will give excess money in the hands of banks which can be used to deploy in higher yielding assets and to improve their net interest margins.
There is no doubt that the move will result in a rise of stock prices of the banks, but is it sustainable?
The key figures to watch will be the liquidity deficit as a percentage of NDTL and the 10-year bond yield. Bonds closed at 8.28% on Friday (ie March 9, 2012) and may remain below 8.20% levels for some days. The market is building in hopes that liquidity will come back to normal levels post-April, when the advance tax money would enter the system again and liquidity deficit can again be near the comfort zone of 1% of the NDTL.
The only problem in the story is the rupee, which can go for a toss if crude oil plays spoil sport. Given the current sound bites from the Middle East it does look that crude oil could disturb the central bank’s planning.
It is thus very unlikely that the RBI would like to bring down its repo rates as the economy still has the unabsorbed inflation from petrol, diesel and LPG under pricing.
The only way out of this situation would be to resume the growth path. The ball is once again in the finance minister’s court.
....more info