<p>Almost two years after it last made such a move, the Reserve Bank of India (RBI) has done it again — cut the corpus banks have to mandatorily invest in government securities (G-Secs) as a proportion of their funds to 23 per cent, a cut of 100 basis points (bps).</p><p>But before you cheer this cut in the statutory liquidity ratio (SLR) which will infuse nearly Rs 62,000 in funds into the banking system, look at the message sent out by the central bank. That it will not oblige a government which refuses to take hard, corrective measures on the fiscal and fuel price fronts with interest rate cuts. It has maintained the repo rate — the rate at which banks borrow from the central bank — at eight per cent; the cash reserve ratio (CRR) — funds impounded with the central bank — stays at 4.75 per cent.</p><p>On the reasons for the SLR cut, RBI governor D Subbarao said: “The reduction of SLR is to ensure liquidity pressures do not constrain the flow of credit to the productive sectors of the economy. This will allow banks to shift their portfolio in favour of the private sector”.</p><p>Yet, a caveat would be in order here. As Krishnamurthy Subramanian, assistant professor of finance, Indian School of Business, says: “Conceptually, a decrease in SLR reduces the amount that banks have to hold in G-Secs. Every rupee that need not be invested in GoISec can be used for lending to the corporate sector. However, given most banks hold SLR considerably above the mandated requirement, it is unlikely that the decrease in SLR will have a substantial increase in corporate lending. I, therefore, expect any growth acceleration due to the SLR decrease to be quite muted and, if at all, with a considerable lag.” Banks now hold about 28 per cent by way of SLR at the systemic level.</p><p><strong>Do Your Part Of The Deal</strong><br />It’s the central bank’s way of making it clear that it will ensure liquidity for the private sector; they need not fear a crowding out on account of the government’s appetite for funds. The reduction in SLR also means that much less by way of an assured captive investor base for G-Secs.</p><p>Says Chanda Kochhar, managing director & CEO, ICICI Bank: “The reduction of one per cent in the SLR will help to make credit available to retail and corporate borrowers and also keep interest rates under control. RBI has sought to anchor inflationary expectations while ensuring liquidity to facilitate credit availability”.</p><p>According to Leif Eskesen, HSBC’s Chief Economist for India & ASEAN, “the RBI deserves kudos for making a tough but right decision, under difficult circumstances. Nail-biting global economic conditions have compelled central banks in advanced and emerging economies to cut rates, and moderate domestic economic growth has drummed up pressures on the RBI to act. However, the RBI kept cool and stayed focused on its objective, which helps cement its credibility”.</p><p>He adds “global economic conditions are a worry, but it's premature for the RBI to act in response to these. If global conditions remain weak or weaken even further, that day may, of course, come. If it indeed does, it is better for the RBI to have preserved the little powder they currently have left”.</p><p><strong>More Bother On Inflation</strong><br />Headline wholesale price inflation (WPI) rose to 7.7 per cent in May from 7.5 per cent in April; it has moderated to 7.3 per cent in June 2012. “The stickiness in inflation, despite the significant growth slowdown, was largely on account of high primary food inflation, which was in double-digits during the first quarter of this year driven by a spike in vegetable prices and sustained high inflation in protein items”, pointed out Subbarao. Fuel group inflation fell to 11.5 per cent in May from 12.1 per cent in April and to 10.3 per cent in June but the reversal in crude oil prices in recent weeks to $103 a barrel is a worry.</p><p>The RBI pointed to the several upside risks which have arisen:</p><ul><li>A deficient and uneven monsoon so far; it can have an adverse impact on food inflation.</li><li>Global crude prices remain elevated. The rupee’s depreciation has added to import prices which in turn has put pressure on domestic fuel prices</li><li>There has been no fuel price hike. Going forward, the embedded risks of suppressed inflation could impact our fuel prices.</li><li>Non-food manufactured products inflation has not moderated in line with the slowdown in growth</li><li>And finally, input price pressures on account of exchange rate movement and infrastructural bottlenecks in coal, minerals and power may exert upward pressure on non-food manufactured products inflation</li></ul><p><br />And in view of the recent trends in food inflation, trends in global commodity prices and the likely demand scenario, the baseline projection for WPI inflation for March 2013 has been raised to seven per cent from the April projection of 6.5 per cent.</p><p>You can kiss all hopes of a rate cut goodbye for some time to come.</p><p> </p>
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