Ra­jan: Not All Ac­counts Il­le­git­i­mate

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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.


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


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