RBI Cuts CRR by 25 bps to 4.25%

Reserve Bank Of India on Tuesday cut the cash reserve ratio (CRR) by 25 basis point to 4.25%.

The Reduction in CRR , will inject around 175 billion of primary liquidity into the banking system.It has made no changes in the Key policy rates.Accordingly , the repo rate under the liquidity adjustment facility remains at 8% .

Consequently the reverse Repo rate under the liquidity adjustment faclility (LAF) , determined with a spread of 100 basis points below the repo rate , wil continue at 7.0 % , marginal standing facility (MSF) rate determined with a spread of 100 bps above the repo rate at 9.0%.

Consideration behind the Policy Move

The decision to cut the CRR and keep the policy interest rate unchanged draws from  assessment of the evolving liquidity situation and the growth-inflation dynamic.

• First on liquidity. Systemic liquidity deficit has been high because of several factors: the wedge between deposit and credit growth, the build-up of Government’s cash balances from mid-September and the drainage of liquidity on account of festival-related step-up in currency demand. This high systemic deficit will have adverse implications for the flow of credit to productive sectors and for the overall growth of the economy going forward.

• As regards the growth-inflation balance, headline WPI inflation moderated from its peak of 10.9 per cent in April 2010 to an average rate of 7.5 per cent over the period January-August 2012. During this time, growth has slowed and is currently below trend. This slowdown is due to a host of factors, including monetary tightening.

• Since April 2012, the Reserve Bank’s monetary policy stance has sought to balance the growth–inflation dynamic through calibrated easing. The transmission of these policy impulses through the economy is still underway. In conjunction with the fiscal and other measures recently announced by the Government, the Reserve Bank’s monetary policy stance should work towards arresting the loss of growth momentum over the next few months. Yesterday’s statement by the Finance Minister reaffirming commitment to fiscal consolidation will open up space for monetary policy to restrain inflation and support growth.

• Now coming to inflation. It turned up again in September, reflecting the partial pass-through of adjustment of diesel and electricity prices, and elevated inflation in non-food manufactured products. It is, therefore, critical that even as the monetary policy stance shifts further towards addressing growth risks, the objective of containing inflation and anchoring inflation expectations is not de-emphasised.

RBI lauds govt efforts in review of macroeconomic and monetary developments

It seems RBI is considering some easing in its policy review, as lauding the government’s efforts the central bank in its review of macroeconomic and monetary developments for the July-September quarter released a day ahead of the second quarter review of the monetary policy, said ‘as macro risks from inflation and twin deficits recede further, that could yield space down the line for monetary policy to respond more effectively to growth concerns.’ Though, it also said that speedy implementation of recent policy measures announced by the government and sustained reforms are important for turning the economy around.

Earlier, Finance Minister P Chidambaram pledged to nearly halve the fiscal deficit to three per cent of GDP by 2016-17 and hinted the central bank should take the cue, as the apex bank has previously called for fiscal consolidation measures from the government. The RBI’s review, however said that fiscal slippage is likely in 2012-13 despite recent measures by the government. Food, fertiliser and petroleum subsidies remain high and are likely to overshoot Centre’s budget estimates.

The report pointed out that the potential growth rate of the Indian economy that peaked around the middle of 2007-08, has since continued its downward slide into Q1 of 2012-13 to around 7.0 per cent and further said that global growth prospects, both in advanced economies (AEs) and in emerging and developing economies (EDEs) too have weakened.

It also talked about inflation which is still much above its comfort zone and was quick to point that inflation has stayed sticky around 7.5 per cent despite the growth slowdown and has emerged as a concern. Consumer price inflation continues to be above the inflation in wholesale price index. It further said that while the near-term inflation risks are on the upside, inflation is expected to moderate from Q4 of 2012-13. However, improved supply responses and moderation of wage inflation is vital for bringing down inflation to comfort level.

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Bond yields oscillate around week’s low level

Bond yields were trading around the lowest level in the week amidst optimism that the central bank will take steps to stimulate bank lending and counter a slowdown in Asia’s third-largest economy. Traders widely expect Reserve Bank of India to reduce lenders’ reserve requirements by 25 basis points to 4.25% at its next policy review on October 30. The monetary authority last lowered the so-called cash reserve ratio on September 17 to 4.50%.

On the global front, US 10-year Treasuries shed a bit of their earlier gains on Thursday after a batch of Chinese data met market expectations or came in slightly better, somewhat easing concerns about the outlook for the world's second-largest economy. Meanwhile, Brent futures stayed above $113 on Thursday, bolstered by hopes for steady growth in demand after China, the world's second-biggest oil consumer, posted growth that met expectations, while simmering tension in the Middle East too provided additional support.

The yields on 10-year benchmark 8.79% - 2021 were trading unchanged at its previous close of 8.15%.

Meanwhile, the yield on benchmark 8.15% -2022 fell one basis point or 0.01 percentage point to 8.14% from its previous close of 8.15%.

The benchmark five-year interest rates were trading unchanged at its previous close of 6.99%.

The Government of India have announced the sale (re-issue) of three dated securities for Rs 13,000 crore on October 19, 2012, which includes (i) “8.19 percent Government Stock 2020” for a notified amount of  Rs 3,000 crore (nominal) through price based auction; (ii) “8.20 percent Government Stock 2025” for a notified amount of  Rs 7,000 crore (nominal) through price based auction; and (iii) “8.83 percent Government Stock 2041” for a notified amount of  Rs 3,000 crore (nominal) through price based auction. The auctions will be conducted using uniform price method. The auctions will be conducted by the Reserve Bank of India, Fort, Mumbai on October 19, 2012 (Friday).

Call rates continue to trade above the repo level

Interbank call rates were trading unchanged at its previous close of 8.05/8.10% on Thursday, as most of the bank already over covered their fortnightly product requirements. However, cash deficit, which also can be gauged from Repo bids, has constantly kept the call rates above the repo level for fourth consecutive session. Seasonal liquidity is expected to deteriorate in this quarter with a pick-up in seasonal cash outflow. However, this could be well counterbalanced with RBI’s OMOs.

The banks via Liquidity Adjustment Facility (LAF) borrowed Rs 101,635 crore through repo window on October 18, 2012, while, the banks borrowed Rs 86,260 crore through repo window on October 17, 2012.

The overnight borrowing rates touched a high and low of 8.10% and 7.95% respectively.

According to the Clearing Corporation of India (CCIL), the weighted average rate (WAR) in the call money market was 8.04% on Thursday and total volume stood at Rs 21,898.87 crore, so far.

As per CCIL data, WAR in the CBLO (Collateralized Borrowing and Lending Obligation) market was 8.01% on Thursday and total volume stood at Rs 13,037.75 crore, so far.

The indicative call rates which closed at 8.05/8.10% on Wednesday were contributions made from Andhra Bank, AXIS Bank, Bank of America, Bank of Baroda, Bank of India, Canara Bank, J P Morgan Chase, Citibank N.A., Corporation Bank, Credit Agricole Bank, Indusind Bank, ICICI Bank, ICICI Securities, IDBI Bank, Jammu and Kashmir Bank, Punjab National Bank, RBS, Societe Generale, Standard Chartered.

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Call rates tad changed on end of first week of reporting cycle

The overnight borrowing rates touched a high and low of 8.10% and 7.95% respectively

Interbank call rates were trading little changed at 8.05/10% from its previous close of 8.00/05% on Thursday, as demand somewhat slowed since most of the bank already borrowed more to set aside mandatory reserves approaching the end of the first week of reporting cycle. Further, even comfortable cash condition prevented further uptick in cash rates.

The banks via Liquidity Adjustment Facility (LAF) borrowed Rs 45,840 crore through repo window on October 12, 2012, while, the banks borrowed Rs 69,265 crore through repo window on October 111, 2012.

The overnight borrowing rates touched a high and low of 8.10% and 7.95% respectively.

According to the Clearing Corporation of India (CCIL), the weighted average rate (WAR) in the call money market was 7.99% on Friday and total volume stood at Rs 16,670.43 crore, so far.

As per CCIL data, WAR in the CBLO (Collateralized Borrowing and Lending Obligation) market was 7.99% on Friday and total volume stood at Rs 43,886.50 crore, so far.

The indicative call rates which closed at 8.00/8.05% on Thursday were contributions made from Andhra Bank, AXIS Bank, Bank of America, Bank of Baroda, Bank of India, Canara Bank, J P Morgan Chase, Citibank N.A., Corporation Bank, Credit Agricole Bank, Indusind Bank, ICICI Bank, ICICI Securities, IDBI Bank, Jammu and Kashmir Bank, Punjab National Bank, RBS, Societe Generale, Standard Chartered. 

August IIP data remains as non-event for bond markets

Bond yields continued trading range-bound as better-than-expected August industrial output data emerged as a non-event. However, investors also preferred cautious approach ahead of Rs 13, 000 crore debt sale auction to be held later in the day.

In a positive surprise, India’s index of industrial production (IIP), a key measure of industrial output registered decent growth of 2.7 per cent in August 2012 at 165.7, lower than the growth rate of 3.4 percent in the corresponding period last year, but way above the consensus estimates of sub 1 percent growth figure. Further, the number was also higher than July month’s negligible growth figure of 0.1 per cent, which was later revised to -0.2 per cent.

On the global front, US Treasuries were supported on Friday with the benchmark 10-year yield staying near this week's low as concerns over corporate earnings and uncertainty over the U.S. presidential election sapped the risk appetite of investor’s. Meanwhile, Brent crude held above $115 a barrel on Friday, trading near four-week highs and on course for its biggest weekly gain in two months, supported by tensions between Turkey and Syria, lower output at North Sea oilfields and upbeat US data

The yields on 10-year benchmark 8.79% - 2021 were trading 1 basis point higher at 8.17% from its previous close of 8.16%.

The benchmark five-year interest rates were trading 3 basis points lower at 7.00% from its previous close of 7.03%.

The Government of India have announced the sale (re-issue) of three dated securities for  Rs 13,000 crore on October 12, 2012, which includes (i) ‘8.07 percent Government Stock 2017-JUL’ for a notified amount of  Rs 3,000 crore (nominal) through price based auction; (ii) ‘8.15 percent Government Stock 2022’ for a notified amount of  Rs 7,000 crore (nominal) through price based auction; and (iii) ‘8.97 percent Government Stock 2030’ for a notified amount of  Rs 3,000 crore (nominal) through price based auction. The auctions, which will be conducted using uniform price method, will be conducted by the Reserve Bank of India, Mumbai Office, Fort, and Mumbai on October 12, 2012 (Friday).

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