Mumbai: Bankers and analysts welcomed the liquidity management measures by Reserve Bank today saying these steps, which were long overdue, will help improve the overall financial system and arrest the fall in money market rates.
Welcoming liquidity management measures, SBI chief Arundhati Bhattacharya said, "the lowering of policy rate corridor will ease volatility in liquidity and short-term rates and help in preserving financial stability."
Echoing similar view, Chanda Kochhar of ICICI Bank said, "a clear articulation on liquidity management is welcome as it would ensure stability in markets by enforcing the sanctity of the operating rate while addressing temporary liquidity imbalances".
Bhattacharya said though reverse repo rate hike to 6 percent was a surprise but added that other measures like substitution of collateral under LAF, allowing banks to invest in Reits and added focus on financial literacy will all go a long way to improve the system.
On stress on NPA resolution, she said renewed focus will help boost investment and aggregate demand going forward.
Chandra Shekhar Ghosh of Bandhan Bank said the reverse repo hike will remove distortions in the shorter end of the market and push the yield on short-term T-bills up apart from helping bank increase their fee income as they will earn 25 bps more when they keep funds with the RBI.
Rana Kapoor of Yes Bank said narrowing of policy rate corridor will help preserve financial stability and in the long run can help bring lending rates down.
Devendra Pant of India Ratings said the moves to contain surplus liquidity, which was begging for a view is an indication of the policy stance inching towards tightening from neutral after announcing neutral from accommodative in February.
At the same time he said this was needed as the maturing CMBs and reduced issuance of T-bills led to treasury bills rate falling below the LAF corridor which is not good.
"Although RBI says it is committed to reverting the system liquidity to a position of neutrality, it does not seem to be sure about how much excess liquidity will remain in the near-term due to the ongoing re-monetisation," Pant said.
Crisil said the MSF rate cut and reverse repo hike will correct the recent steep fall in money market rates and steer these rates closer to the repo rate. "The focus on inflation control can bring more predictability to policymaking and engender a low and stable inflation regime. Both are beneficial to investment and consumption," it said.
Icra's Naresh Takkar said policy tone with focus on inflation points that the RBI may be on hold through out 2017.
Japanese brokerage Nomura said the revised estimate on inflation is on the lower side as it expects higher rural wages, a narrowing output gap and adverse base effects will push inflation closer to 5.5-6 percent in H2.
"Therefore we expect the repo rate to remain on hold through our forecast horizon, but risks are skewed towards a hike in 2018. As inflation risks become apparent, we also expect a 100 bps CRR hike in H2 2017 to absorb surplus liquidity," Nomura said.
Radhika Rao of DBS Bank said higher base projections of CPI at 4.5 percent in H2 of FY18 suggests limited conviction of RBI that the 4 percent target can be met in the medium-term.
However risks of a hike are negligible for now.
The move to tighten liquidity is likely to push up T- bills yields but the average overnight rate may rise only by a few basis points, said Citi in a research note, adding it also indicates a shift towards a single policy rate regime.
"The increase in reverse repo is a step towards a single policy rate regime, where MSF will be 25 bps above repo and SDF will be 25 bps below repo.
"Such mechanism can free RBI from collateral related constraints while minimising short-end volatility due to excess liquidity. This can also reduce fears of an imminent CRR hike or OMO sales," Citi said.
