Indian Banks

The bond market sprung a surprise with only a marginal rise in yields on a day when the Reserve Bank of India raised the cash reserve ratio by 75 basis points (bps) to suck out excess liquidity in the system.

RBI kept policy rates (repo and reverse repo rates) unchanged. The CRR hike was 25 basis points higher than what the market had estimated. CRR will be 5.75 per cent by the end of February 2010. The effect of the rise will be spread over a month.

The current bonds yields have already factored in an upward revision in inflation estimate to over 8 per cent.

The yield on the benchmark 10-year paper (6.35 per cent 2020) closed at 7.58 per cent today as against 7.55 per cent yesterday, according Negotiated Dealing System (NDS) data.

It is rare for the bond yield on the benchmark paper to move just 3-4 basis points in response to the policy review. There was a surprise element (CRR hike), said J Moses Harding, executive vice-president with IndusInd Bank.

Yields have eased in the second fortnight of January 2010 after remaining elevated, often crossing the 7.75 per mark. A senior treasury official with State Bank of India said the yields would remain range-bound unless RBI announced some tough action to manage inflationary expectations.

Call rates remain steady despite CRR hike
The interest rates in inter-bank overnight lending market remained steady on ample liquidity in the system.

The call money rate ended unchanged around 3.25 per cent, as liquidity enabled banks to raise funds at the lower end of the interest rate corridor, dealers said.

The CRR hike will be implemented in two stages. A first rise of 50 bps will be effective from the middle of next month and the second rise of 25 bps will be operational from the end of the next month. The decision will take out Rs 36,000 crore out of the system.

“Liquidity is abundant in the system as usual and demand was not seen much today because of advance covering of reserves by banks. So, there was downward pressure on CBLO rate,” said a dealer at a state-owned bank.

Today, the central bank raised CRR by 75 bps in two stages. The first, a 50-bps hike, will come into force on February 13, and the second, a 25-bps hike, will be effective from February 27.

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An increase in the cash reserve ratio (CRR) by the Reserve Bank of India (RBI) might not translate into an immediate increase in lending and deposit rates, bankers said.

Bankers pointed out that the system was flush with funds and companies were still not drawing upon the sanctioned loan facilities despite a pick-up in demand for credit. For instance, till recently, for State Bank of India, the gap between sanctions and disbursals was of the order of Rs 50,000 crore.

A broad section of the financial sector players expects the Indian central bank to increase CRR, or the proportion of deposits that banks set aside, by 50 basis points (bps) in the third quarter review of the monetary policy due on Friday. One basis point is a hundredth of a percentage point. There are also a few who expect policy rates to start moving up.

“This mode of exit — removing liquidity first and then following it up with rate hikes — appears to be an internationally-accepted norm for those economies that went in for heavy liquidity easing. The US Fed, which led the quantitative easing drive, seems to focus on withdrawing its bond buyback programme before easing rates. China’s first monetary step taken last week was a hike in reserve requirement,” HDFC Bank said in a recent report.

An increase of 50 bps in CRR would suck out around Rs 20,000 crore from the system. But given the low credit demand for the last two months on an average, banks parked upwards of Rs 70,000 crore with RBI through the daily reverse repo operations.

The growth in bank credit, which dropped to 9.65 per cent for the year-ended October 2009, has seen some improvement. But bankers attributed a part of the Rs 79,515-crore disbursals by banks in the last fortnight of December 2009 to quarterly targets. Besides, some said, the government had also put pressure on the public sector players to help loan growth.

“Liquidity is available in the system. Though an increase in CRR will suck out some liquidity from the system, but interest rate is also a function of demand and supply. Banks have sufficient liquidity and deposit growth is also healthy. Economic growth has just started and RBI may not like to do anything to hamper it, though inflation is a concern,” said Allahabad Bank Chairman and Managing Director JP Dua.

Andhra Bank Chairman and Managing Director RS Reddy added that an across-the-board rise in lending rates was unlikely due to an increase in CRR. There could be repricing of lending rates for loans granted at rates below benchmark prime lending rates (BPLR), he added. “It would help improve margins,” Reddy said.

With banks beset by low credit demand, they have been offering short-term loans at a discount to the prevailing BPLR to ensure they could earn some returns on funds which would be otherwise sitting idle. Besides, there will be a rush to meet the annual credit growth targets during the last eight weeks of the financial year, a senior banker said.

“It depends on what kind of rate hike we are talking about. If it is a (rate hike) symbolic hike, nobody will upset the term rate structure. I don’t think that a 25 or 50-bps increase in CRR will immediately upset the credit markets and term rate structure because of liquidity and the need for achieving the loan target,” said Oriental Bank of Commerce Chairman and Managing Director TY Prabhu.

In addition, the Centre’s borrowings are due to end soon with the last tranche of Rs 8,000 crore to be auctioned by the first week of February. This is also expected to result in lower pressure on liquidity, as the government has been borrowing between Rs 7,000 crore and Rs 10,000 crore a week since October.

There could be some movement on the deposit rate side, with the rate on a few maturities seeing an upward bias. So far in 2010, ICICI Bank and Union Bank of India have raised rates on one maturity each. But as ICICI Bank Managing Director & CEO Chanda Kochhar told Business Standard in an interview last week, “An increase in one bucket should not be seen as an increase in interest rates.”

(BS)

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Ahead of the Reserve Bank’s quarterly monetary policy, global consultancy firm Ernst & Young today said the central bank is likely to signal an interest rate increase to suck out liquidity from the market and check prices from spiralling further.

t further said the Reserve Bank may also raise the amount banks need to park with the apex bank (CRR) by up to 50 basis points.

“The Reserve Bank could raise the short-term borrowing (reverse repo) rate by 25 basis points. The central bank is likely to hike cash reverse ratio by up to 50 basis points,” Ernst & Young partner & national director for financial services Ashvin Parekh said.

The Reserve Bank will announce the third quarter review of the monetary policy on January 29, amid speculations that it may signal an interest hike to tighten money supply and check rising prices. Parekh further said there is inflationary pressure and the wholesale price index is likely to reach 8.5 per cent by the end of the current financial year.

(BS)

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Reserve Bank of India is likely to hike the cash reserve ratio (CRR) – the portion of deposits banks have to keep with the central bank – by 25-50 basis points without waiting for the scheduled review of the monetary policy in January 2010. The CRR remains unchanged since January 17, 2009 when it was cut 50 basis points to 5 per cent.
Duvvuri Subbarao (RBI Governor) met Pranab Mukherjee(Finance Minister) to discuss the macro-economic situation after the latter presented the mid-year review of the Indian economy today in Parliament . According to Mukherjee’s the growth outlook for the full year is likely to be 7.75 per cent or even higher.
As per, the finance ministry “ base effect gives , rise in the price index. Therefore unlike the finance ministry, the RBI is also worried about rising prices.
Inflation for November rise from 4% to 4.78%, which was 1.34% in the previous month.

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