RBI faces calls for rate cuts, liquidity boost

Bloomberg

India’s economic soft patch has put Asia’s most dovish central bank on notice, yet again.
Growth cooled to 5.8 percent in the first three months of the year, the slowest pace in several quarters, according to a government report. That took the expansion in the fiscal year to March 2019 to 6.8 percent, lower than the 6.9 percent median estimate in a Bloomberg survey.
Despite the central bank’s two interest-rate cuts this year, borrowing costs in the economy aren’t coming down fast enough. Liquidity has also dried up in recent months as demand for cash picked up ahead of India’s six-week election.
That’s kept a lid on investment and consumption in the economy, and adds to pressure on the central bank to take more easing action this week. Not only by lowering interest rates, but also by adjusting its monetary stance to an accommodative one and injecting more liquidity into the financial system.
“Is there a room for rate cut? Yes, definitely,” said Suyash Choudhary, head of fixed income at IDFC Asset Management Ltd. in Mumbai. “But unless the market is comfortable with respect to expectations on liquidity those cuts will not get fully transmitted.”
Constrained by a widening budget deficit, Prime Minister Narendra Modi — who was sworn into office for a second term last week — may increasingly look to the Reserve Bank of India for help in spurring lending and growth. Inflation has also been relatively benign, well below the bank’s 4 percent medium-term target, giving policy makers ample room to ease.
Despite the central bank pumping in cash via open market bond purchases and foreign exchange swaps, financial conditions have been tight in the past few months.
According to Deutsche Bank AG, the net deficit on rupee liquidity has averaged $8 billion in the past six months. The Reserve Bank of India will look to possibly shift towards a surplus of between $2 billion to $4 billion over the next six months as it tries to fix the problems with the shadow banking sector and improve policy transmission, it said in a report.
“We expect the RBI to reduce the repo rate by another 25 basis points at its June 6 policy review and — importantly — shift to targeting a surplus in banking system liquidity to counter a slowdown in growth,” said Abhishek Gupta, India economist. He sees the RBI’s terminal rate at 5.25 percent, implying two more rate cuts after a June move.
The central bank plans to publish more information on how it assesses liquidity conditions in the banking system in an effort to provide greater clarity to the market, people familiar with the matter told Bloomberg.
Bond yields have eased in the past three weeks, mirroring a global rally in debt. The yield on the benchmark 10-year security dropped 10 basis points to 7.03 percent , the lowest since December 2017.
“The market appears comfortable with further RBI cuts with short-term yields and swaps pushing lower post elections,” said Eugene Leow, a rates strategist at DBS Group Holdings Ltd. in Singapore. “We think that the market is on point with the next cut likely to come in June.”

SBI sees opportunities in shadow banking crisis
Bloomberg

India’s largest lender is hoping to capitalise on the country’s shadow banking crisis by building its mortgage and small business loan book as the non-banks are forced to pull back.
State Bank of India, which is slowly emerging from a period of massive provisioning on loans to large corporates like Essar Steel India Ltd., sees opportunities in taking business from the shadow banks without creating new asset quality problems, according to Chairman Rajnish Kumar.
“We are not shying away from any business but that does not in any manner mean that we are going to dilute
our underwriting standard,” Kumar said in an interview. “And I believe there is sufficient business that meets our underwriting standards.”
India’s shadow lenders have been under pressure since last year, when a series of defaults by Infrastructure Leasing & Financial Services forced the government to intervene and exposed weaknesses in the sector. The crisis has forced non-banking financial companies to sell assets and restrict new loans, giving state-owned lenders an opportunity to claw back market share they have lost over the past decade.
Kumar said SBI’s strong capital gives it the leeway to seek more mortgages and small business loans, which had been a focus for the NBFCs before the crisis erupted. That should help the bank attain its target of 11 percent loan growth for the year to March 2020, Kumar said, slightly lower than the 12 percent growth of the previous fiscal year.
Privately-owned banks are also showing greater caution, providing another opportunity for SBI, Kumar said. “In a situation where many private sector banks have become very, very cautious, it has opened up lot of headroom available for corporate credit growth for the bank,” he said.
Home loans and other consumer lending accounted for 6.48 trillion rupees ($93 billion), or 32.5 percent, of SBI’s total domestic lending as of March 31. Advances to companies in India accounted for another 43 percent of the book, while SME lending was 14.5 percent.
Despite seeing opportunities in the problems faced by shadow lenders, Kumar said the government needs to take steps — such as providing partial credit guarantees to the NBFCs — to prevent wider damage to the economy.