Bank Policy Tuesday: Keeping lasting promises

The SLR slough off has finally come. It was in the works for years, while Raghuram Rajan was still working out the logistics in U Chicago 15 years back and will finally bring down India’s required reserves to 23% levels over the next 5-6 quarters. That promise is not something that happens every other day. It is also a recognition that India can keep its superior positioning for growth only so much more without exports that lack quality and loans that still seem to be going bad well into the take off period for growth and also a recognition that India needs to be very careful.  The repo rate is down to 6.75% and will probably not have many more rate cuts but likely still the Repo rates will touch 6% at the top of the cycle giving impetus for bank rates to come down steeply and India 10 year yields should now come down from that 7.74% plateau that is not helping anyone plan growth.

The repo-reverse repo corridor is the narrowest as bond rates refuse to catch up with the lower inflation and a tamped down forecast in line with RBI plans for a target 4% inflation in the near future (Urijit Patel recommendations) setting a decade of solid growth but with FinMin refusing to do much else but wait on the RBI guv to do the needful apparently. This time again the RBI has gone ahead and led the markets to the direction of change with a steep rate cut and if banks still feel queasy about manipulating lending rates and bringing credit back, it would hurt everyone.

Amazingly enough even with the sense of urgency in the steep cut, most indicators are healthy including the fisc forecast for FY2016 with a buoyant market for IPOs. India of course is as always at the growth take off point , better off than all other emerging markets including China, Sensex according to the ET only down 6% in one month compared to 16% cut in the MSCI Emerging Markets Index.

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