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Google Bookmarks Newsvine Live Bookmarks Technorati Yahoo Bookmarks Blogmarks Del.icio.us ApnaCircle The author has posted comments on this articlePTI | Aug 5, 2012, 12.00PM ISTMUMB AI: The recent one percentage point reduction in statutory liquidity ratio (SLR) of banks will have no impact either on the liquidity front or on interest rates but will only harden the bond yield, feel economists. Siddhartha Sanyal of Barclays India says the SLR cut will be ineffective in the near-term. "This reduction, in principle, increases banks' resources that are lendable to t he private sector by Rs 65,000 crore. In reality, whether such an increase in le ndable resources translates into higher lending depends on a host of other facto rs," he said. Noting that currently the banking system is holding excess SLR equivalent to ove r 4 per cent or over Rs 2.5 trillion, Sanyal said given subdued business confide nce, weak capex and poor risk appetite, an immediate uptick in banks' credit dis bursals appears unlikely. Citi India chief economist Rohini Malkani said the 100 bps SLR reduction should reduce "forced" demand from banks by about Rs 65,000 crore a day. On July 31, the RBI surprised everyone with leaving all the key rates unchanged and slashed the SLR, which is the money banks keep invested in government bonds and other notified instruments by 1 per cent to 23 per cent. This was the second SLR reduction since 2010, when in last October the RBI brought down the ratio t o 24 from 25 per cent. Notably, banks on an average hold 29 per cent of their deposits in SLR which fet ch 7.75 to 8 per cent yield but without any risks like lending to corporates. Kotal Mahindra Bank chief economist Indranil Pan said the SLR cut will have no i mpact in the short-to-medium term as the SLR holding in the system averages at a round 30 per cent, well above the mandate. "There will not be any immediate benefits out of the SLR cut because given the g rowth outlook, credit rise is expected to soften from the current momentum. And with the risk of NPAs rising, banks may be hesitant on taking higher exposures t o the private sector, implying that the investments into government risk-free se curities are unlikely to come off," Pan argued. But he admitted that the move will has already hardened the 10-year benchmark bo nd yields. "Upside risks to bond yields however exists in the medium term, consistent with our call of fiscal slippages," Pan said. Similarly Malkani of Citi also said it will impact the bond movement though it m ay not be as big as the headlines would suggest. The muted trend in credit growth, positive carry of longer dated bonds are likel y to incentivise banks to hold on to their current bond unless they see a pick u p in credit growth, said Malkani.

Nomura India chief economist Sonal Varma said the SLR reduction is only symbolic measure to ease liquidity and smooth credit flows to the productive sectors of the economy. Morgan Stanley India economist Chetan Ahya opined that the SLR cut indicates tha t the RBI recognises the stagflation-type environment in the economy with weaker global growth environment, coupled with higher risks to domestic growth, which it has revised down to 6.5 per cent. Deutsche Bank chief economist Taimur Baig said the SLR cut is only a symbolic ge sture as most banks hold much more liquidity in government bonds voluntarily. However, Bank of America president & India country head Kaku Nakhate hailed the SLR cut saying given the global volatility, the high external debt, deterioratio n in the net international investment position, wage inflation and poor monsoons , this will encourage banks to reduce lending rate to the corporate world includ ing SME to some extent. "The move will also help the economy in short-term, it needs to be followed up b y government policy actions to invite foreign flows, FII and FDI, by clearing th e hurdles to encourage infrastructure development in our country," he said. Deloitte India senior director Anis Chakravarty also described the move as a bol d step, although he said the move may not show any significant impact as liquidi ty conditions have been already eased out since the April policy.