RBI gives more money to banks
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Dec. 16: The Reserve Bank of India gave borrowers one reason to cheer as it didn’t raise any of the policy rates on Thursday. The Central Bank also produced a pleasant surprise by cutting the statutory liquidity ratio (SLR) , that is the amount that banks have to keep aside before lending. This means borrowing won’t get more expensive, for now. Last week, many of the large banks in public and private sector had raised their loan rates. However, analysts say that given that loans are growing faster than deposits, banks could start raising lending rates in January again.
The net impact of RBI’s move will be to introduce additional liquidity, or money, in the market. Apart from reducing the SLR, the RBI will also be buying back government securities, which will inject Rs 48,000 crore in the money market.
The banks were having a problem with deposits falling and credit demand increasing. The RBI in its mid-quarter monetary policy review however warned that inflation is still a major concern and Thursday’s provision of liquidity “should not be construed as a change in monetary policy stance since inflation continues to remain a major concern.
The measures taken in this review need to be appreciated in that context. This sets the tone for the January mid-term review which is due on January 25. Mr Abheek Barua, chief economist, HDFC Bank said “the move came as a pleasant surprise to the market,” even while RBI “maintained its hawkish rhetoric on inflation.” He said the OMO buy-back of Rs 48,000 crore over the next month means Rs 12,000 crore per week starting December 24,2010. Welcoming the RBI policy SBI MF’s chief investment officer Navneet Munot said the RBI has clearly taken forward its intention to relax the excessive “liquidity deficit” plaguing the banking system.
It should greatly comfort the banking and corporate entities who were worried at the rapidly rising borrowing costs. “RBI clearly seems to not let any excessive tightening come in the way of a sustainable growth path,” he said, Dr Arun Singh, senior economist, Dun & Bradstreet Information Services India Pvt. Ltd however was of the view that the effectiveness of the lowered SLR for the banking system as a whole is likely to be limited given that several banks are maintaining SLR above the required limit. It might improve liquidity conditions at individual bank level.
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