Rajan: Not All Accounts Illegitimate
Reserve Bank of India Governor Raghuram Rajan intervened in the debate over the Panama Papers, saying that inquiries will need to be conducted to determine whether any wrongdoing was involved. He said there could be genuine reasons for Indians named in the Mossack Fonseca leaks to have offshore accounts.
“It is important to note that there are legitimate reasons also to have accounts outside, the LRS (Liberalised Remittance Scheme) allows you to take money out,” Rajan said after unveiling the monetary policy on Tuesday. “We have to see what is legitimate and what is not legitimate.”
“Borrowing is significantly cheaper and will continue to get so. Because of MCLR (marginal cost of lending rate) we already have a 25-50 basis points rate cut before the policy. Don’t look at it as 25 basis points. Look at the composite of measures. They all add up. And borrowing rates are coming down significantly in the economy. You will see significantly more transmission in the economy,” Rajan told reporters. MCLR is the benchmark for loans to new customers with effect from April 1, taking over from the base rate.
The stock market wasn’t too enthused, given expectations of a steeper 50-basis-point reduction, although global influences were also at play. The Sensex ended 2% down at 24,883.59 points. One basis point is 0.01 percentage point.
The rupee lost about 0.38%, or 25 paise, against the dollar to close at 66.46. The Indian currency opened at 66.27 and touched an intra-day high of 66.07, a level last seen on November 19, 2015. The benchmark bond yield rose to 7.46% versus 7.42% on Monday. Bond yields and prices move in opposite direction. During the day, it fell to 7.37% after RBI cut the policy rate. Measures such as reducing the penal interest on banks for lending will increase the flow of cash into the banking system and prompt financial institutions to offer cheaper credit, thus persuading companies to invest more, create jobs and shore up uncertain economic growth. “The Reserve Bank intends to first meet requirements of durable liquidity, and then use its fine-tuning operations to make short-term liquidity conditions consistent with the intended policy stance,” Rajan said. “This may result in seemingly anomalous situations in which the Reserve Bank injects durable liquidity even when it is using short-term instruments to withdraw excess short-term liquidity, but such actions will be consistent with our dual objectives of liquidity management.”
Real estate and automobiles could be beneficiaries with some expecting a 20-basis-point drop in home and car loan rates in a month.
The central bank, which has always maintained that fighting inflation was its primary target, has come close to declaring victory. Retail inflation is forecast to fall to 4.2% in the fourth quarter of fiscal 2018. To be sure, the implementation of the Seventh Central Pay Commission has not been factored into the equation. The salary increases could bump inflation up by an additional 100 to 150 basis points over two years, experts said.
FISC PRUDENCE AUGURS WELL
The government’s fiscal prudence — Finance Minister Arun Jaitley has pledged to stick to targets in this regard — and its investments to boost supplies augur well for the economy. That opens up the possibility of more interest rate cuts as RBI maintains and extends its accommodative stance.
The repo rate, at which RBI lends to banks, has been cut to 6.5% from 6.75%. The marginal standing facility (MSF), the penal rate, has been cut by 75 basis points to 7% and the reverse repo rate, what RBI pays banks for deposits, has been raised to 6% from 5.75%. This fine-tuning of monetary policy — narrowing the interest rate corridor between repo and reverse repo besides raising MSF — is expected to see call rates declining. Banks’ cost of funds is seen dropping and at the same time they will earn more from RBI on excess cash.
“This is a liquidity-oriented policy and clearly lays out a framework that gives a lot more comfort to banks in managing their cash flow mismatches,” said V Srinivasan, deputy managing director at Axis Bank. “Lower policy rates coupled with adequate liquidity will lead to effective transmission that policy acknowledges and seems to achieve.”
Having defied calls for quicker and steeper interest rate cuts from industrialists and investors, Rajan is easing monetary policy as other inflation-driving factors such as rural wages, food prices and imported inflation are cooling.
Though there is no cut in the cash reserve ratio (CRR), the proportion of deposits that banks keep with RBI without deriving any interest, they only need to maintain 90% of the amount instead of 95% with effect from the fortnight of April 16. “Beside the headline policy rate, a range of factors will determine financing conditions in India including liquidity provision and progress towards cleaning up banks’ balance sheets,” said Marie Diron, senior vice-president, Moody’s Investors Service. Market participants and analysts expect repo rate cuts amounting to 50 basis points this year but the timing will depend on how various factors play out, including the JuneSeptember rainy season.
“There can be another 25-basis-point cut after the monsoon situation is assessed,” said CARE Ratings Chief Economist Madan Sabnavis. Bad monsoons and unseasonal weather have wreaked havoc on India’s farmers in the past few years, depressing the rural economy and adding to inflationary pressure on food prices.
Still, inflation has evolved along RBI’s projected trajectory. The target set for January 2016 was more or less met. Retail inflation in February was at a three-month low of 5.18%, closer to the RBI target of 5% by the first quarter of this fiscal.
Addressing the liquidity crunch will lead to immediate relief, bankers said.
“If liquidity issues can be addressed, it will go a long way to ensure softer rates,” said Keki Mistry, vice-chairman of mortgage company Housing Development Finance Corp. RBI announced the monetary policy schedule for the coming year — these will be announced on June 7, August 9, October 4, December 6, and February 7, 2017.
Reducing the penal interest on banks for lending will increase the flow of cash into the banking system
MAKING A POINT