Opinion The waiting game

It isn’t surprising that the RBI has kept its benchmark repo or lending rate unchanged at 7.75 per cent in its latest bi-monthly policy review, even while reducing the statutory liquidity ratio (SLR) requirements for banks by 50 basis points to 21.5 per cent of their net deposits. The central bank had already cut its repo rate by 25 basis points on January 15, outside of its scheduled policy review cycle. Given that no new information on inflation or other relevant macroeconomic indicators has come to light since then — the newly introduced GDP series showing growth to be significantly higher than previous estimates has only caused confusion — it is understandable that Governor Raghuram Rajan has preferred to wait. The Union budget, to be presented later this month, will give a clear picture on the government’s fiscal consolidation path and supply-side reform measures for the RBI to take further action on rate cuts down the road.

But one thing is already clear: the RBI has embarked on a monetary easing cycle. It has no alternative, really, given that the current policy rates are out of sync with market realities. Take, for instance, yields on the 10-year government bonds that are currently at around 7.65 per cent, below the 7.75 per cent repo rate. It is perverse that 10-year money should be cheaper than overnight money. Among other things, it indicates that the markets expect interest rates to come down in the near future along with falling inflation. The RBI cannot ignore these signals. Also, keeping domestic interest rates artificially high for too long will only lead to corporations bypassing Indian money markets to raise funds overseas. Reliance Industries Ltd and Delhi International Airport Ltd have recently raised $1 billion and $289 million from 10-year and seven-year offshore bonds at 4.125 and 6.125 per cent, respectively.

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The reduction in the SLR — the portion of deposits banks have to compulsorily park in government securities — is seen as creating space for expanding credit. But that will happen only in the long run. As of now, the situation is that banks are investing almost 30 per cent of their deposits in government paper, as against the SLR of 22 per cent. This, if anything, indicates poor credit demand and the fact that the money market is not in equilibrium. Given that Rajan has left the door open for even out-of-cycle rate cuts, there are chances of his doing so before the next scheduled policy review in April. In fact, he should — by early next month.