RBI cuts CRR: How will it impact lending rates?

Moneycontrol Bureau

As the Reserve Bank of India's (RBI) decision to cut cash reserve ratio (CRR) by 25 basis points (bps) will inject Rs 17000 crore in the system, there are whispers that bankers may reduce lending rates further.
However, RK Bakshi, ED of Bank of Baroda feels that lending rates are unlikely to be changed. It at all lending rates are reduced, he points out, it will be out of competition and not because of the CRR cut.
"CRR cut is to take care of the busy season ahead and the tax payments and to see that the liquidity is enough to see that the payments and all markets continue to function smoothly. If there is a credit demand that gets taken care of. But right now, any rate cut will be driven only by considerations of competing and being able to deploy the excess liquidity that we have rather than anything," he said in an interview to CNBC-TV18.
Bakshi adds that CRR cut won't really impact the big flow of non-performing assets (NPAs) but only home loans of the venerable people or some SME loans they will be definitely benefitted to some extent.
He explains that going by market dynamics, the rates on deposits have tended to go lower and other players will follow suit which would definitely open up a scope for moderating the rates of interest. Guidance: Will there be further easing?
Sonal Varma, Nomura India believes that inflation is going to spike above 8% very soon in the coming months and the RBI's projection of 7% by March clearly has upside risk. She, however, believes that there is likely to be an overall growth of around 5.8% this fiscal year with growth almost flat in the September quarter. 
Varma feels that RBI seems to be predisposed towards easing. “The monetary conditions index in India has already been going towards the accommodative zone, also helped by a weaker currency till about recently. I think all those actions in any case will reinforce RBIs concerns on growth,” she elaborates.
Sajjid Chinoy, JPMorgan agrees that there will be opportunistic easing in the next few months. "If inflation, crude prices come off and the currency appreciates then you could get the odd rate cut or two. But to expect dramatic easing from this moment on will just not be permitted I think by the kind of inflation trajectory that we expect going forward," he reiterates.
Chinoy is looking at about 5.6% growth for this year which implicitly assumes some pick up in the second half. However, there are concerns around inflation trajectory to be significantly higher because of electricity price increase, diesel price hike and the fact that global commodity prices will be higher than we initially thought. According to him, inflation is likely to go above 8-8.5% over the next few months.
Meanwhile, Anant Narayan, Standard Chartered Bank also believes that RBI will sort of take on the mantle of trying to address the growth perspective as well and hopefully the macro economic situation globally.
"I think the guidance given by the RBI which looks at growth is focusing on the right part. To me growth has a direct bearing on inflation in terms of improving supply. It has a direct bearing on fiscal deficit, because the only way India generally controls fiscal deficit is by increasing revenues which requires growth and it has a direct bearing on FX itself, because balance of payments requires that India positive growth story tor remain, so that money comes in into the system," Narayan emphasises. Bond market
Looking at a bond yield range of 8.05-8.25%, Anant Narayan of Standard Chartered Bank is optimistic that rerating of overall risk in India is still some distance away.
Stressing that a mere Rs 17,000 crore is not going to fix the liquidity crunch which stands at Rs 40,000 crore. "Specific to government bonds, every time we have liquidity infusion through CRR cuts, in the minds of the market players it takes away the need for further OMOs to that extent. As of now the market is reacting to the possibility of less OMOs from the RBI to the tune of Rs 15000 crore to Rs 20,000 crore to OMOs going through. So that is a knee jerk reaction to a CRR cut as oppose to a repo rate cut which just sound a little confusing at times," he explains. Nasrin Sultana
Nasrin.sultana@network18online.com