Will SLR cut change outlook on lending, deposit rates?

The Reserve Bank of India (RBI) in its April-June quarter monetary policy left interest rates unchanged for the second time since June. This move was in line with consensus estimates.

It kept repo rate at 8% and cash reserve ratio for banks at 4.75%. The central bank trimmed its growth forecast and raised inflation outlook as economic conditions worsen.

However, it cut the statutory liquidity ratio (SLR) to 23% from 24% earlier.  SLR is the percentage of total deposits that lenders need to invest in the government bonds. This reduction is aimed at ensuring free flow of credit growth through enough liquidity in the system. 

The cut in SLR is a step in the right direction , C Rangarajan, chairman of PMEAC told CNBC-TV18. He expects this SLR cut to be accompanied with open market operations (OMO).

However, RK Bakshi, ED, Bank of Baroda doesn’t see change in SLR having sharp impact on deposit rates immediately because of the deficiency of liquidity in the market.

Most overseas investors were banking on rate cuts expected to come at the end of this quarter. Since that didn’t materialise, one cannot be sure of the direction of the capital flows coming in the country, he elaborated.

Given the high inflation and current liquidity condition, Bakshi does not expect fixed deposit rates to fall too much immediately. "It would not be possible to moderate lending rates if fixed deposit rates don’t fall," he added.

On the other hand, Shailendra Bhandari, managing director and chief executive officer, ING Vysya Bank sees SLR cut as a positive move. "We now save on 1% of our SLR. If we borrowed at 9.5%, we put into SLR bonds at 8%, we lose 1.5%. So, we save that 1.5% on 1% of our deposits. So that comes to 1-1.5 bps on our margins."

This would help banks to boost margins by 1-2 bps, he highlighted. But, he added an SLR cut alone would not be enough to encourage banks to start lending at lower rates.

If extra liquidity is pumped in the system through OMOs then that might eventually bring rates in the system down. We could then see a scenario where overnight rates on some days might slip below the repo rate, Bhandari elaborated.

Meanwhile, Anant Narayan, managing director and global markets co-head of wholesale banking, South Asia Standard Chartered Bank is of the view that the system doesn’t necessarily require rate cuts at this stage since liquidity situation is very positive currently.

There would be more money flowing in the system once RBI pays dividend to the government next month. "If this SLR cut is accompanied by OMOs then liquidity should improve further," he added.

According to him, SLR cut would not augur well for government bonds because it reduces demand for bonds, hence Narayan expects the SLR cut to be absorbed by way of OMOs.

"Until there is clarity on whether or not OMOs will happen, bond yields will remain under pressure." If OMOs do not happen then the 10 year bond yields can rise up to 8.5% over the next six weeks because of relentless supply, he warned.

Harsha Jethmalani
harsha.jethmalani@network18online.com