Jun 03, 2014, 04.19 PM IST | Source: CNBC-TV18
The industry players, however, feel the move may not have an impact in the short run. But lauds the steps taken to enhance the depth of the foreign exchange market as well as raising foreign exchange remittances limit to USD 125,000.

The Reserve Bank of India in its second bi-monthly Credit Policy on Tuesday cut Statutory Liquidity Ratio (SLR) rates by 50 bps to 22.5 percent while keeping key policy rate, CRR and Reverse repo rate unchanged at previous levels.

The cut in SLR rates points at expectation on credit uptick, hence creating liquidity in the market for that becomes important, says Naina Lal Kidwai, Director, HSBC Asia Pacific & Country Head HSBC India. Most Indian banks have been parking SLR at an average of 29 percent when the requirement was only 23 percent.

“So, it is really dependant on credit requirements going up, but yes (the cut) it will allow banks to dip into their SLR securities and bring that into the credit requirements as and when they begin to go up. Thus, in that sense, it doesn’t release liquidity into the system right away, but it enables banks to do that as when required,” Kidwai told CNBC-TV18 while discussing the impact of RBI monetary policy.

Joining the discussion Shilpa Kumar, Head of Global Markets Group, ICICI Bank said: “The RBI had been talking about an SLR cut for a while, and now they have seen the opportune time to go ahead with it.”

She thinks the move is meant to make money available when the growth is expected to pick up.

“The initial reaction on the bond markets side might be little negative, but given the fact that at this point in time, the credit is slack, also there is interest in our bond market from global investors, I think this would eventually balance out the somewhat short-term negative response to this event,” she said.

Welcoming the decision, SS Mundra, CMD, Bank of Baroda , said that as far as SLR cut is concerned, it points towards an expectation of revival of industrial activity and increase in credit demand. He thinks the central bank is probably releasing more money for the banking system to diverse it towards credit.

“The liquidity has been maintained, only the components have shifted. Thus, I think it is a step in the right direction,” Mundra said, adding that the policy reflects a consistency.

Ananth Narayan, MD, Co-Head, Wholesale Banking South Asia, Standard Chartered Bank, said an SLR cut was clearly “out of syllabus” given the fact that credit offtake is quite low at 13.6 percent at current levels and there are surplus funds available with the banking system to deploy in government bonds.

Though he agrees that the step will make money available with the corporate sector on an overall basis, he doesn’t think the overall impact will be too much in the short run.

“We still have FII demand for government bonds because of yield’s attractiveness. Over the course of year, we need to see how this trend continues. At the moment we may see a 4-5 points selloff, then the market will take a breather,” he added.

In addition, Kidwai also finds steps taken to enhance the depth of the foreign exchange market very encouraging. The Reserve Bank has allowed foreign investors to participate in the domestic exchange-traded currency derivatives market to the extent of their underlying exposures plus an additional USD 10 million. It has also enhance the eligible limit for foreign exchange remittances to USD 125,000.

“There is comfort on the way the rupee reserves look. Hence the signaling effect of it — whether taking the individual limit back up from USD 75000 to USD 125000 or announcements regarding currency derivates, which in itself is not material — point to the fact that we have a desire to bring back, what we can of rupee trading that is legitimate, onshore. To create a vibrant market, it is very important. And I think that gets covered here,” she concluded.

Source : http://goo.gl/XKomJG