INVESTORS PLEASE LISTEN !: RBI Eases - Repo, Reverse Repo Rates Cut by 50bps

Thursday, March 5, 2009

RBI Eases - Repo, Reverse Repo Rates Cut by 50bps

As expected for sometime now, yesterday evening, RBI cut Repo (liquidity injection) and Reverse Repo (liquidity absorption) rate by 50 bps to 5% and 3.5% respectively . Slowing economy and falling inflation gave RBI enough room and reason to reduce rate. Though it was not one of the 'big bang' rate cut, it was a welcome move.

With this move, the RBI has cumulatively cut the repo rate by 400bps (from 9% to 5%) and the reverse repo rate by 250bps (from 6% to 3.5%) since September 2008.

RBI still feels that transmission of previous cuts has not been fully transmitted to the system. Bank credits growth has declined from a high of 29% in Oct'08 to 19% in Feb.
While liquidity has been ample with banks parking money with RBI and net LAF has turned positive. RBI estimates that total liquidity available to the market through various measures at Rs 3.9 tn which is enough to fund the government's enhanced borrowing program (gross borrowings are pegged at Rs3.4trillion in FY09 against Rs2.7trillion currently).

With new government coming to power by June, the onus of stemming the deceleration in growth now lies with RBI. As inflation moves into the deflationary patch and weakness in macro-economic data continues, we can expect further easing in coming months.
Lowering of Reverse Repo is a clear indication to discourage parking money with RBI and increase lending. We expect both deposit and lending rate to go down.
Already, SBI, PNB, Allahabad and Central Bank of India have offered around 200 bps discount on loans against quality collateral in order to keep NPAs at low levels.
It is positive for the bond market.

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