RBI frees up Rs 45,000 crore funds in banking system by lowering SLR to 50 basis points

MUMBAI: If Finance Minister Arun Jaitley comes up with decent fiscal numbers and oil price stops surging, chances are that the Reserve Bank of India will cut policy rates after the Budget. Till then, RBI Governor Raghuram Rajan hopes that competition among banks and softening rates in the money market will force them to lower lending rates.

On Tuesday, which also happened to be Rajan’s 52nd birthday, RBI refrained from cutting interest rates at the last monetary policy before the Budget, but freed up Rs 45,000 crore funds in the banking system by lowering the statutory liquidity ratio (SLR) — or, letting banks hold less government bonds.

While SLR was cut 50 bps to 21.5%, the repo rate — the benchmark policy rate at which RBI lends to banks — was untouched at 7.75%. At the media conference, Rajan was categorical that the interest rate cycle has turned but was unwilling to commit to any pace or timing of rate cuts.

“Don’t hold me every 15 days for something new…We have a Budget coming up, there will new GDP numbers,” he said.

“Let the monetary policy process follow its due course. In India it works with a lag of three months…We are steering a ship that moves slowly,” said the RBI governor, who left for Delhi soon after addressing the media to attend an investor conference. He expects the government to come out with good fiscal numbers. The Sensex fell 122 points to close at 29,000, pulled down by bank stocks with punters unwinding their positions in the absence of a rate cut.

Some of the senior bankers said they would not rush into a rate cut. Arundhati Bhattacharya, the chairman of the country’s largest lender State Bank of India, said, “We will have no choice but to lower rates, but this is unlikely to happen before March end.” SBI’s base rate stands at 10%, among the lowest in the industry. But even if banks do not proactively cut rates, the market, according to Rajan, would bring down rates. “Banks are now facing competition from the money markets and a number of corporations directly issuing commercial papers. At some point, banks have to react and that will force them to cut lending rates,” he said.

According to Andhra Bank Chairman CVR Rajendran, as more and more corporates tap the bond market, loan books of banks would shrink, and would prompt them to reduce lending rates. “Also, inflow into emerging markets on account of quantitative easing by global central banks would drive banks to reduce rates,” he said.

Tuesday’s policy was a nonevent for financial markets, but it gave Rajan an opportunity to tweak some of the rules in lending and investments. He gave banks greater flexibility and negotiating power in dealing with truant borrowers, reviving stalled projects, roping in new management to replace a failed one. Also, he changed the rules of the game for foreign institutions to reduce hot money inflow and introduced “non-callable deposits” to enable banks generate stable funds.

Fearing that easy money could boil over and push up the rupee, Rajan has doubled the amount individuals can invest overseas to $2,50,000. “When elephants fight, it’s the grass that suffers,” said Deputy Governor Urjit Patel while referring to the quantitative easing by European and Japanese central banks.

The rupee strengthened 12 paisa, or 0.20%, against the US dollar to close at 61.68 while the 10-year benchmark government bond yield on Tuesday rose six basis points to close at 7.72% as prices fell. Since January 1, the paper has dipped 16 basis points.