Sebi’s P-Notes moves make RBI task easy

The measures announced by SEBI to rein in foreign fund inflows seem to have reduced the need for a hike in CRR in the impending credit policy , reports BS Srinivasalu Reddy.

The measures announced by Securities and Exchange Board of India (Sebi) on Thursday to rein in foreign fund inflows seem to have reduced, if not removed, the need for a hike in cash reserve ratio (CRR — the portion of bank deposits to be kept in reserve) in the impending credit policy. Even rate cut signals are unlikely to be delayed.

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The mid-term review of credit policy of the Reserve Bank of India scheduled for October 30 is expected to maintain status quo on all fronts. However, if the foreign investment inflows pick on the possible cut in interest rates in the US a day after the RBI review, there might be a mid-term hike in CRR, experts said.

“Sebi’s decisions on Thursday have given some headroom for the RBI in foreign inflows and foreign exchange management. Though there is a chance to hike CRR by a moderate 0.25 per cent to suck out excess lend able resources with banks, I feel it is unlikely,” said Abheek Barua, Chief Economist, HDFC Bank.

“We think the RBI will maintain status quo. Besides the impact of Sebi guidelines, the RBI has started buy-sell operations in the foreign exchange futures markets to blunt the impact of foreign inflows,” Indranil Pan, Chief Economist with Kotak Mahindra Bank.

Economists are also ruling out the RBIs tinkering with the interest rates — reverse repo rate (at which banks are paid for parking funds overnight) and repo rate (at which RBI lends funds to banks) for now, despite inflation remaining at about 3 per cent level.

This is because of the Damocles swords hanging in the form of higher Consumer Price Index (CPI) and transmission of global crude prices on to the consumer, they say. Different CPI measures are ruling in the range of 6-8 per cent, while the global (Brent) crude prices were at $87/barrel on Friday.

However, the bogey of excess liquidity is set to subside. A Prasanna, Economist with ICICI Securities said, “Demand for funds is likely to look up during the festive season of Deevali, resulting in lower liquidity in the banking system.”

Though much sought after interest rate cut is not likely to happen now, there is a flickering hope for the same if the efforts of some banks to plump for it, citing the slow down in credit growth below the 24-25 per cent level set by the RBI, fructifies. Year-on-year credit growth has slowed down to 23.5 per cent, from about 30 per cent over the last three years.

The key rate cuts in the US are likely to result in higher growth in foreign investment inflows, forcing the RBI to hike CRR as part of inflow management.