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Hint of liquidity boost in review

Mumbai, Aug. 4: The RBI is unlikely to cut the repo rate in its policy review tomorrow but may reduce the statutory liquidity ratio (SLR) by 25-50 basis points, bankers feel.

SLR is the proportion of deposits banks have to invest in government securities, while the repo is the rate at which the RBI lends to banks.

RBI governor Raghuram Rajan had brought down SLR by half a percentage point to 22.5 per cent in June. That reduction released close to Rs 40,000 crore into the banking system.

Some analysts feel that the RBI may also bring down the held-to-maturity (HTM) limit in banks’ SLR portfolio from 23 per cent.

While banks have to mark-to-market bonds that are not part of the HTM category, bringing down the HTM limit may improve liquidity in the banking system.

Such a measure may not be good news for bond prices as it will increase their supply in the market.

“There may not be any action on the interest rate front but there could be some action that will induce additional liquidity into the system,” Oriental Bank of Commerce chairman and managing director S.L. Bansal said.

The widespread expectation that the RBI will not tinker with the repo rate (now at 8 per cent) comes despite recent data showing a drop in key inflation numbers.

SBI chairperson Arundhati Bhattacharya said the RBI was likely to keep interest rates intact in the review. “I think status quo (in policy rate) is more likely,” she said.

HDFC Bank deputy managing director Paresh Sukthankar held a similar opinion. “Our view is that policy rates are likely to remain stable.”

Bank of America-Merill Lynch said it expected the rate cut to happen either in December, if the monsoon manages to cool down inflation, or early 2015 in case the price rise got prolonged. “We continue to expect the governor to be on hold on August 5... the RBI will be on long hold till it is clear that inflation is truly coming off,” it said.

“The RBI is likely to leave rates unchanged despite easing inflation. (There is) no hurry to ease rates,” DBS said.

Retail inflation eased to 7.31 per cent in June after rising to 8.28 per cent in the preceding month. Wholesale price, too, rose at a slower pace in the same month.

Bankers feel the RBI is not ready to cut the benchmark rate because of two factors.

While the drop in inflation in June was partly because of a base effect, it will be wary of upward risks to prices emanating from a deficient monsoon and geo-political risks.

Market circles are keenly looking forward to the guidance that will come out from the apex bank tomorrow and the initial opinion is that it will be hawkish.

“Inflation eased in June because of factors such as a favourable statistical base. However, there are hidden pressures on inflation such as a deficit monsoon and a geo-political uncertainty. Given the spikes in food and fuel prices, the RBI is unlikely to let loose its guard on inflation. Therefore, the RBI will maintain a hawkish guidance,’’ Rupa Rege Nitsure, chief economist at Bank of Baroda (BoB), said.

A note from Yes Bank said the impact of the upward revision in railway fares was yet to be felt on inflation.

“The increase in passenger fare will have a direct impact of 7 basis points on headline CPI inflation. The overall impact is likely to be higher because of spillover from the upward revision in freight charges. CPI inflation is expected to once again shoot above 8 per cent in the month of July,’’ it added.

 
 
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