MUMBAI: The Reserve Bank of India (RBI) held interest rates steady, while boosting banks’ liquidity in a bid to persuade them to lower lending rates after they failed to pass on the benefits of the last official rate cut three weeks ago.
The RBI kept its policy repo rate unchanged at 7.75 percent, as expected by analysts, leaving its next reduction probably until after the government presents its annual budget at the end of this month. “Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since January 15, it is appropriate for the Reserve Bank to await them and maintain the current interest stance,” the central bank said in a statement.
Instead, to prod banks to lend more and lower their lending rates, the RBI cut the statutory liquidity ratio (SLR) — the minimum portion of net deposits that banks must hold in government bonds, cash or gold — by 50 basis points to 21.5 percent from February 7.
Only three of India’s 45 commercial banks cut base lending rates in the wake of the RBI’s reduction in the repo rate by 25 basis points on January 15, hurting the government’s drive to lift business investment.
Bank profits have been poor, but RBI Governor Raghuram Rajan said that given the weak credit growth, banks would have to start lending again at some point. “To get that lending they will have to be more competitive, which means they will have to cut base rate. I am hopeful it is a matter of time before banks judge that they should pass it on,” Rajan told a news conference. “Many have been relatively quick to cut their deposit rates, but not so quick to cut their lending rates, I presume some are hoping they can get the spread for a little more time to repair banks’ balance sheets.”
While RBI officials suspect banks are trying to protect profit margins, commercial bankers complain that liquidity conditions have been too tight for them to lower lending rates.
Encouraged by falling world oil prices and inflation slowing, the RBI had surprised investors last months by kicking off a new easing cycle, to boost credit in a economy struggling to gather momentum.
The RBI held out the prospect of more rate cuts, but said that would depend on government efforts to reduce India’s fiscal deficit and fix the supply constraints that keep food and energy prices high in the country.
The rupee currency, bonds and share markets all eased slightly after the RBI announced it was leaving rates unchanged this time.
Markets are pricing in more interest rate cuts over the rest of the year given consumer prices rose 5 percent in December, well within the RBI target of 6 percent by January 2016.
“We believe the RBI can come up with one more 25 basis points rate cut any time between mid-March and next policy date of April 7,” said Shakti Satapathy, a fixed income strategist for AK Capital in Mumbai.
The RBI described the domestic economy as “subdued”, regardless of the government revision of gross domestic product data, using a new formula which showed the economy grew 6.9 percent in 2013-14, instead of 4.7 percent. The RBI added it was too soon to incorporate the new calculation of GDP, but using the old base it estimated growth at 5.5 percent in the year ending in March, and forecast growth of 6.5 percent in 2015-16.Reuters
MUMBAI: The Reserve Bank of India (RBI) has allowed lenders more flexibility to restructure large projects that stall when cash runs out, but stopped short of giving banks freer rein on other problematic loans.
In the RBI’s monetary policy statement review, Governor Raghuram Rajan said banks could extend timelines for large stalled projects by bringing in new ‘promoters’, or owners.
Banks in India have the largest exposure to the infrastructure sector, and have become more cautious about lending to it after bad loans surged as growth slowed. “If there is a new promoter brought in, then banks could get some more time to complete the project... That could put some projects that are stuck back on the field,” Rajan said.
But he stopped short of allowing different treatment for restructured loans, or those likely to turn bad, from bad loans after April 1. This means banks will have to make additional provisions. Banks had sought an extra year, given the slow pace of economic recovery. “We have given an enormous amount of new flexibility in trying to get these projects back on track,” Rajan said. “But I don’t think the answer is to extend and extend and extend — it is to call a spade a spade.” The banking sector has roughly $97.23bn of stressed assets, 45 percent of which have already turned sour, with the rest in the restructured or the troubled category. Rajan also said the central bank was still in talks to hammer out a deal with market regulator SEBI to beef up the equity banks can hold if they swap bad debts for shares.Reuters
