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Economy

RBI Cuts Rates, Won't Change A Thing, Startups Can Borrow Abroad: RBI Policy Decoded

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RBI has cut rates by 0.25%. The repo rate – the rate at which banks borrow overnight from the RBI – is now at 6.25%. The reverse repo rate (at which banks park excess cash with the RBI) is 5.75%. This is after inflation fell to 5% suddenly in August, which is around the target for March 2017.
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This is the sixth rate cut since Jan 2015.
The rate cut hasn’t changed things much for the bond market. Yields remain steady – with the old 10 year at 6.9% and the new 10 year at 6.78%. (Transition period now, so we will quote both yields)

Will this reduce my EMI?

In all probability, no. Why not?

  • For banks, borrowing costs have fallen substantially. They are now offering deposits at 7% or so which is very low. Their wholesale borrowing costs are in the 7% to 8% zone already.
  • Yesterday evening, banks borrowed 32600 cr. from the RBI. But they also parked excess cash of 131,500 cr. back into the RBI. The liquidity surplus is now nearly 100,000 cr!
  • Meaning: Banks aren’t borrowing from the RBI. They are parking 100,000 cr. of cash with the RBI. If anything, the rate cut will only hurt them.
  • If their borrowing costs are already low and they have excess cash, then they should have already cut lending rates. But they haven’t.
  • Goes to prove that if current factors haven’t prompted a drop in lending rates, banks are just behaving like a cartel and trying to keep lending rates high while they see their borrowing costs go down.
  • Some Banks have been doing tiny cuts to their marginal lending rates (MCLR) which is the lowest rates for different tenures. See Capital Mind’s Bank Rate Tracker.
  • The transmission has been terribly slow. And honestly, the only thing that will fix this is more banks to level the playing field.

However, there is hope and if this rate cut prompts an increase in competition then we might see lending rates fall too. RBpo

Won’t Equity Markets Go Up?

Well, consider this. The Nifty was at 9000 in Jan 2015 when the rate cut cycle STARTED. It’s 1.75 years more now. And still we are seeing a Nifty at 8700. And company earnings have fallen. And inflation is  down.
All these factors tell you just one thing: Don’t go on theories. The market will do what the market wants to do.

Is Anything Interesting?

Well, Urijit Patel is the new Governor. And the policy is determined by a Monetary Policy Committee – and rates are by majority vote rather than by dictat of the governor. The MPC will meet for two days and get very very tired, apparently, looking at the 15 minute abrupt press conference, and only then will they issue the policy statement.
There’s also this whole Liquidity Thing.
Given the massive excess liquidity and the stable rupee, it’s quite likely that the RBI has been buying dollars even as FIIs have been pumping money into India. Which eases a lot of the trouble we have been thinking about with respect to the FCNR exits that happen later this year.
A few other things they have done:

  1. Exim Bank, SIDBI, NABARD and NHB also fall into the Basel III guidelines. This will change some operations, but we’ll know how much only after actual notifications come out by end of October.
  2. Banks have “large exposures” to companies or promoter groups. This will be handled system wide in a LE framework. Final guidelines soon (end Oct) but will be implemented only by March 2019.
  3. The S4A frameworks – Sustainable Structuring of Stressed Assets – involves banks restructuring NPAs and taking a hit on part of the debt. They wanted the remaining part to be marked as Non-NPA. That will be allowed now.
  4. Operational guidelines to small and payment banks will be issued soon. Like this week.
  5. Companies who have Indian subsidiaries can now hedge their currency exposure. Unlike earlier, when only those foreign companies that had actual trade (imports/exports) could hedge. Not a big deal unless you’re one of them MNC types who have salaries here.
  6. Startups can take debt from abroad. This is huge – upto $3 million can be sourced from abroad as a loan, per year. Guidelines to come later.