The Reserve Bank of India (RBI) has cut repo rate and reverse repo rate by 25 basis points. RBI left the cash reserve ratio (CRR) unchanged.
Key Highlights
The LAF Repo changed from 5.00% to 4.75% with immediate effect.
LAF Reverse Repo changed to 3.50% and 3.25% with immediate effect.
The Cash Reserve Ratio maintained at 5.00%.
The Bank Rate too left unchanged at 6.00%.
Real GDP growth target in 2008-09 revised downwards to 6.5-6.7%. FY10 GDP expected at 6%.
Year-end inflation target for FY10 revised to 4.00%
Money supply growth for FY10 revised downwards from FY09 to 17.0%.
Aggregate deposits growth and non-food credit growth down for FY10 compared to last fiscal.
Strong moral suasion for banks to lower lending rate.
Bottomline:
RBI maintains a dovish stance with a significantly low GDP estimate for FY10. This token rate cut of 25 bps is definitely not the last of the rate cut and we expect further rate cuts in coming months as and when required.
RBI strongly feels that ‘there is scope for overall interest rate structure to move down’. The present rate cut is taken to reinforce this process. So, expect both deposit & lending rates to come down. Even though RBI wants to expand flow of credit to productive sectors to boost growth, it also cautions banks on monitoring loan portfolios to maintain asset quality.
RBI is committed to conduct large govt borrowings in a smooth manner through tenure management, OMO and MSS unwinding. For 1H FY10, the OMO purchases and MSS unwinding will add primary liquidity of about Rs.1,20,000 cr that is equivalent to a CRR cut of 3.0%. We expect RBI to assume bigger role. A positive for bond market.
Various new market initiatives (like, STRIPS, Separate Trading for Registered Interest and Principal of Securities, to be launched during the current financial year, new multi-modal settlement mechanism through commercial banks only available for MFs will be extended to insurance companies, pension funds and co-operative banks) will be welcomed by the market.
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