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RBI Policy Tomorrow: No Rate Action, Lots of Policy Action

Tomorrow at 11 AM the RBI will unveil it’s bi-monthly credit policy.

My expectation is:

  • No repo or reverse repo rate changes. There’s no point bringing this down right now as currenlty the CPI is higher than 8% which is the longer term goal.
  • CRR will stay low, but there is a small chance of a 0.25% increase. The noise that RBI has been making about banks hiding the bad stuff in their balance sheets could simply mean they need to keep more cash in reserve against the assets they own.
  • Foreign investment limits in Debt may be increased. FIIs are buying debt like there’s no tomorrow. And the limits of $20 bn for auctions – at a rate around Rs. 50 to the dollar – is ludicrously low. It might help to increase those limits since FIIs are already at 80% of the limit. While RBI hasn’t made any noises around this, it’s something that’s been long overdue.
  • If that’s done, then we might see lower SLR. Banks already have too many government bonds on their books compared to SLR required, and a lower limit will be useful in driving future action.
  • The concept of “Term Repo” will continue and we will see “Reverse Term Repo” as well, for banks to put cash into the RBI. It will initially be a weekly term reverse repo, so that banks can flush excess liquidity into the RBI on a term basis and not just overnight. Technically all excess liquidity should be given to other banks – how does it make sense that some banks borrow from the RBI at 8%+, but other banks have excess liqudity and park it with the RBI at 7%?
  • Repo limits will continue. The current limit of 0.25% of assets isn’t likely to fall much more from here.

Policy Action

There is need for policy action on other fronts, definitely. These will have been discussed with the government and there needs to be more clarity on many of these topics.

  • What about New Banks? There has to be a better
  • The ownership of PSU banks has been discussed a lot. In the lines of the CPSE ETF – where the government put in their stake of certain companies, and the ETF shares have been sold – we could see a move to pool in public sector banks stake into a holding entity. This generates cash for the government through a sale, but since the shares are held in an ETF it doesn’t let other parties get access to large voting blocks or management seats.
  • The RBI might actually, and finally, set up the base for capital account convertibility, i..e. Freeing the Rupee. (Okay this is more a wish than a prediction, but what the heck)
  • Banks will have to tighten up. Asset quality is a concern that RBI has mentioned at least twice in the last month, and we’ve seen United Bank of India and J&K Bank showing signs of very large potential NPAs. RBI scrutiny will go up, and banks may see much more tightened regulation of their Special Mention Accounts (SMAs).
  • We might see a new issuance (and change in rules) of Inflation Protected Bonds. 
  • The Payment Bank framework might be released. This is a “maybe” because it’s not enough time since the last policy and we might actually see it only in August.

Many of Rajan’s Five Pillars are not yet seriously addressed. We do have much more clarity on monetary policy, but we don’t really see credit flowing to SMEs, we don’t have more banks (or an idea of when we will see them) and we aren’t dealing with the distress we are already seeing. Financial markets only seem stronger, but we continue to see little action against fraud or misselling (either in bank lending, or in debt defaults or in RBI acting against banking entities) and we remain indebted to foreign investor inflow for our higher prices.

Much of this must change. I hope the RBI will release a better NBFC policy. I hope they will completely free the rupee. I hope they will reduce friction in KYC. I hope they create incentives to collect employment data so that we can actually see what employment metrics are. I hope they reduce the incentives to housing, so that other parts of the economy can benefit.

But that is hope. Reality is at 11 AM tomorrow. See you on the other side.

  • Aayush says:

    If you focus on his previous policy announcements, in Jan we had a rate hike and it was in line with Emerging Markets over the scare of Fed tapering, though at time the rupee didnt depreciate as compared to other EM Currency, we still had a rate hike which I feel was more to do with USD INR then inflation.
    His thereafter stance has been relative to what fed is doing. In his last policy he decided to wait for the center before giving a cut. Now that we have a stable govt, inflation which was mainly food is getting slowly in control, chances of a cut increase. Further, a rate cut will depreciate the currency and this is what RBI has been doing lately, trying to control USD INR. Whats ur view on it?

    • Firstly, rate hikes won’t cause INR appreciation, and rate drops don’t depreciate the rupee. This is something I’ve been talking about for years – it’s the exact opposite in fact, because equity flows are higher and you can’t arb out the transactions.
      Secondly, the only reason to dicker around with rates is for inflation, and that has been clarified in the monetary policy. Specifically, CPI inflation.
      Lastly, inflation is a continuing concern so any hint of a rate drop necessarily requires inflation to be falling which it has not been…
      But then, I may be wrong 🙂