RBI cuts rates again on April 21st 2009, looking to fuel growth: Policy Highlights & Impacts.

The Reserve Bank of India (RBI) cut its key lending rate for the sixth time in 7 months on Tuesday and pushed commercial banks to follow suit to bolster growth which has taken a bigger-than expected hit from the global downturn.

Some Important Highlights

  • Repo rate cut by 25 bps to 4.75%.
  • Reverse repo rate cut by 25 bps to 3.25%.
  • Bank rate and CRR (Cash Reserve Ratio) remains at 6% and 5% respectively.
  • Banks asked to review BPLR system & make credit pricing more transparent 
  • Payment of interest on savings bank account on a daily product basis, wef April 1, 2010.
  • Settlement of OTC trade on corporate bonds
  • Buy-back of FCCBs (Foreign Currency Convertible Bonds) out of internal accruals, subject to certain discounts, upto USD 100 mln permitted to corporates.
  • Loan against NRI deposit increased from INR 20 lac to INR 1-crore .
  • Interest rate futures to be launched shortly for 10-year paper.
  • STRIPS (separate trading for registered interest and principal of securities) to be launched this year 
  • Credit rating agencies to be kept under surveillance.

Some important Impacts.

  • Deposit rates of banks will go down.
  • Lending rates on all the loans including new and existing loans will go down.
  • NRI,s can borrow more, from earlier INR 20 lacs to now INR 1 crore against FCNR or NRE deposit.
  • Money kept in Savings bank a/c will give more interest. So from present around 2.5% to 2.75% it might go upto 3.25%-3.5%
  • Banks & bond houses can cover some of the risks arising out of a rise in interest rates with the help of interest rate futures.
  • Liquidity in the markets will increase due to STRIPS. STRIPS is like splitting the interest element on a bond you are holding and selling it down.  This will help in the stock market upturn.

General View:

The Reserve Bank of India expects economic growth, which slowed to a six-year low of 5.3% in the December quarter, to pick up to as much as 6 percent over the next year.

The yield on India’s benchmark 10-year bonds fell three basis points to 6.15%  today & I think it might fall to 6 % before this month end. The impact will be on the benchmark notes which are already rallying and it might go up more, as falling borrowing costs and rising cash at banks boost demand for debt.

To extra boost the economy the RBI might buy back the MSS bonds issued last year to drain out excess liquidity from the market. The only concern which we need to understand is that the monetary easing done in India by our central bank has been in line with our monetary policy and nothing extra ordinary seems to have been done like central banks in other continents. We can call it the conservative stand of our central bank. 

Investment Option:

A staggered investment option to equity with a 1-2 year of staggering preferably via mutual funds will be a decent option to enter Equity markets and investing into Income fund still shows some upside above fixed deposit of banks.

Keep investing…

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