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Economy

RBI Release: Rate Cuts, Sector Sops

The RBI has cut rates by 1%. The Repo rate is now 6.5% and the reverse repo is 5%.

Just 1%? I believe a much bigger response is necessary, but then that’s what it is for now. Load up on Gilt funds – that’s my response. A lot more is going to come; this is very insufficient. Gilt watch: the 2018 g-sec is already trading at a yield of 6.76%. (It may not come down to 6.5%, but if it does, the gilt will see a price rise of nearly 2%)

  • SIDBI and NHB to get short term funds – 7000 and 4000 cr. respectively. This is largely to try and lend more to small and medium businesses. (My opinion: Hot air. Not going to do much)
  • FCCBs can now be bought back, through I-banks, even without using forex reserves (of a company). Companies can issue ECBs (essentially, non convertible loans) at a 15% discount on the book value of the current FCCB. [I honestly don’t understand this point – shall have to find out what it means]
  • FCCBs can also be bought back using rupees – but only at a 25% discount (whatever that means) and with a limit of $50 million drawn only from internal accruals (companies can’t go get local debt to pay back FCCBs)
  • Housing loans for under 20 lakh are now “priority sector”. This helps with certain priority sector committments banks have to follow.
  • Earlier, commerical real estate loans, if “restructured” classified as NPAs or something close. Now a relief has been given – they’re not going to be called “non performing”l; they will be “standard”. (Go on, builders, ask your bank to restructure!) This does not apply to your home loan because you are strictly small fry.
  • Second restructures – meaning, I tried but I can’t even pay back the lowered EMI or principal or interest, so help me again – also needn’t become NPAs, they go into “standard” loans.

Very interesting package. Lots of relief for banks and the real estate sector. Very good for FCCBs that are now underwater, but the companies still will have to find funds to buy them back – borrowing is no longer easy.

I still don’t know some of the terms (“discount to nominal value of the FCCB”) – if someone does, could you help?

This should perk up the markets – nowadays, anything helps. But it doesn’t look good in the longer term – deeper, bigger cuts are needed.

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