The Reserve Bank of India (RBI) on Tuesday, while announcing the second-quarter review of monetary policy, left the key rates unchanged but hiked the statutory liquidity ratio (SLR). It also tightened non-performing asset (NPA) norms and made lending to the real estate tougher. The March 2010 target for inflation was also raised to 6.5% from 5% earlier. How are the changes going to impact the economy, industries, equity markets, bonds, liquidity and growth among others? Experts discuss
Policy reactions
The hiking of the statutory liquidity ratio (SLR) — the minimum amount banks to need keep with themselves — was primarily done to contain the government’s borrowing programme and not liquidity, feels Haseeb Drabu, Chairman of Jammu & Kashmir Bank. He added that the biggest takeaway was the tightening of NPA norms.
“One of the weakest things about the Indian banking space has been the NPA coverage and that has been hiked to about 70% now, which is a good thing for the long term but at the moment [it could be a negative].”
RBI being hawkish
“The RBI definitely has a hawkish tone,” said Sonal Varma of Nomura. “It’s been clear that the exit from the loose policy is going go be liquidity withdrawal first, rate hikes later,” she added pointing out that the central bank had stopped its open market operations (OMO) and may now proceed to hike the cash reserve ratio by the year end.
“Overall, clearly, the RBI is getting worried about inflation. Another thing that the RBI has mentioned is excess liquidity fueling into asset prices,” she said. “The RBI is getting worried about asset prices increasing fast and that possibly explains the provisional risk weights that have been increased on the real estate sector.”
Bonds to stay range-bound
Nilesh Shah, Managing Director of ICICI Prudential, said the government may resort to a two-pronged way. “You can’t just tame inflation with rate hikes and curbing liquidity. India
Shah added that the bond markets were already pricing in high inflation and the lower remaining government borrowing may help yields to not spike up sharply. “For the time being, 7–7.5% on the 10-year looks like a likely range,” Shah said.
Stock market impact
The hiking of the SLR may not have a tangible impact on stock market liquidity, said Dipan Mehta, member of the Bombay Stock Exchange (BSE). The markets on Tuesday reacted negatively and the Nifty plunged over 100 points. “The RBI policy has just been the trigger where now the reality of interest rate hikes is in a matter of months, not years. I think the market is just factoring it in,” Mehta said. “Maybe you could see this continuation for a few more trading sessions.”
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