The Reserve Bank of India (RBI) governor Raghuram Rajan chose to stick to the script on Tuesday, keeping rates key policy rates changed. In the bi-monthly monetary announcement today, the RBI kept its key policy repo rate unchanged as widely expected, but warned about inflationary risks should a shortfall in monsoon rains spark a surge in food prices.
The RBI also lowered banks' minimum bond holding requirements, known as the statutory liquidity ratio (SLR), by half a percentage point to 22.0 percent to free up more money for lending, effective from August 9. The RBI also cut the ceiling on debt that must be held-to-maturity by half a percentage point to 24 percent.
"With some continuing uncertainty about the path of the monsoon, it would be premature to conclude that future food inflation, and its spill-over to broader inflation, can be discounted," the RBI said in a statement.
Most bankers do not see much of an immediate impact of the monetary policy because of poor credit demand. Arundhati Bhattacharya, Chairman, State Bank of India said the PSU major is "already very liquid" and with the latest SLR cut, she expects another Rs 6500 crore getting freed up. "Going forward, we are all hopeful that this credit demand will pickup so may be in six months time this will come in handy," she told CNBC-TV18 in an interview.
Speaking to the media after the policy announcement, Rajan said he will not hold interest rates high any longer than is necessary, and if disinflation proceeds as warranted, there will eventually be room to cut rates. The central bank is monitoring the liquidity situation and trying to keep the call money rate close to 8 percent, Rajan said.
Bhattacharya believes Rajan is unlikely to soften mainly because projections indicate that end of the year or in January, inflation will be around at around 6 percent odd. "The rate cuts will only come about when he (Rajan) is quite convinced that that glide path is going to be achieved. So, if it is closer to 6 percent rather than away from it, that is when I would expect that the rate cut would come," she said.
The poor credit growth has been also because banks have been quite cautious in lending. Bhattacharya expects credit growth to pick up next year, after big ticket investments start moving.
Rajan said obligations put on Indian banks need to be reduced further as they are entering a more competitive environment and the statutory liquidity ratio will have to be cut further. Rajan also said interest rate tools are blunt and the central bank is trying to use other tools.
Shilpa Kumar, Head of Global Markets Group at ICICI Bank said: "As we get into 2015, there is a convergence of liquidity standards. There is going to be a fairly high pre-emption on account of trying to converge global liquidity standards with Indian liquidity standards. SLR is something, which is different and specific to Indian banking sector, and reducing SLR is also partly towards converging with the new requirements of liquidity coverage ratio (LCR)."
Kumar, meanwhile, expects the RBI pause to continue for an extended period.
SBI stock price
On July 28, 2014, State Bank of India closed at Rs 2490.25, down Rs 10.95, or 0.44 percent. The 52-week high of the share was Rs 2833.85 and the 52-week low was Rs 1452.90.
The company's trailing 12-month (TTM) EPS was at Rs 145.88 per share as per the quarter ended March 2014. The stock's price-to-earnings (P/E) ratio was 17.07. The latest book value of the company is Rs 1584.34 per share. At current value, the price-to-book value of the company is 1.57.
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