To help release resources for credit, the Reserve Bank of India (RBI) in its fifth bi-monthly monetary policy on Wednesday announced a calibrated reduction in Statutory Liquidity Ratio (SLR) levels by 25 basis points per quarter starting from the January to March 2019 quarter until the SLR level reached 18 per cent. The SLR ratio currently stands at 19.50 per cent and lowering the SLR would prod banks to lend more rather than park their cash in safe-haven government securities. According to economists, the move is positive for bond yields as it will release around Rs 1.5 lakh crore of incremental liquidity in the banking system.
The RBI’s stated policy is to making Liquidity Coverage Ratio the focus area of Liquidity management. As per the existing roadmap, scheduled commercial banks have to reach the minimum Liquidity Coverage Ratio (LCR) of 100 per cent by January 1. At present, Statutory Liquidity Ratio (SLR) is 19.5 per cent of Net Demand and Time Liabilities (NDTL). In order to align the SLR with the LCR requirement, it is proposed to reduce the SLR by 25 basis points every calendar quarter until the SLR reaches 18 per cent of NDTL. The first reduction of 25 basis points will take effect in the quarter commencing January 2019, said the RBI.
Despite calls for a cut in the cash reserve ratio (CRR) to ease liquidity, the RBI choose to retain it at 4 percent and clarified that CRR is not in the ambit of monetary policy committee (MPC). The RBI reassured the market of an “elevated” level of bond purchases continuing via open market operation (OMO) until March.
Despite lower SLR and no cut in the CRR, bond markets cheered the central bank’s proactive stance on liquidity support/OMOs. Post the MPC decision announcement the 10 year bond yield spiked and settled at 7.50 percent, a couple of basis points higher than it was pre-policy. But comments from deputy governor Viral Acharya, in the press conference comforted the bond market. After the RBI policy announcement, India’s 10-year benchmark bond yield fell closing at 7.44 per cent from previous close of 7.57 per cent. The rupee too strengthened to 70.46 to the dollar from 70.50 before the policy statement.
Acharya assured that bond purchases via open market operations would continue and that long-term repo operations would be used alongside.
RBI has announced Rs 10,000 crore OMOs for November (on top of Rs 40,000 crore already undertaken), with another Rs 40,000 crore in December. A total of Rs 1.5 lakh crore worth OMOs have been conducted in FY19 yet far (excluding December), with prevailing liquidity shortfall suggesting more are in the pipeline. Cumulative purchases might total Rs 3 lakh crore in FY19.
Soumya Kanti Ghosh, group chief economic adviser at State Bank of India said, “The reduction in SLR effectively could have been only 1.5 per cent (LCR of 100 per cent on January 19 requires 18 per cent of NDTL). Nevertheless, this will send a positive signal for the markets and bond yields as it will release around Rs 1.5 lakh crore of incremental liquidity. This also means that LCR and SLR cannot co-exist, as hypothetically SLR cannot be reduced ever to lower than 18 per cent (a sine qua non of Public Debt Management Agency coming into existence). We believe 10 year yields could drift down to 7.3 per cent, if not lower.”