Event update - CRR cut

In a surprise move (post market hours), the RBI cut CRR by 75 bps from 5.5% to 4.75%. The cut would be wef 10th Mar 2012 (beginning of the new reporting fortnight). This cut is likely to release around 48,000 cr of liquidity into the banking system..

What triggered this sudden move ?

The system liquidity has for long been in a deficit mode - much higher than the envisaged +/- 1% of NDTL range (arnd 60,000 crore). Also, next week being the advance tax outflow week would have further accentuated the liquidity woes. This therefore seems a proactive measure from the RBI to grant the system atleast some respite in anticipation of further tightness

What to expect next ?

We are not too sure if the policy review scheduled for Mar 15th would effect any benchmark rate cut. The reason for the same is sticky crude oil prices. One cant ignore the fact that crude oil imports constitute an intergral part of the total imports. This, alongwith an impending petrol / diesel price hike could be the reason for the RBI to be on hold. However, the recent domestic macro economic data,suggestive of a slow down does indicate that the RBI should act sooner than later. Hence it would be a tight rope walk to hazard a guess on such act.


How would markets react to CRR cut ?

Shorter end of the yield curve is likely to get the much needed respite due to the CRR cut. We expect yields to ease off by 25-50 bps as an instant reaction and stabilise at those levels. Advance tax week would continue to keep liquidity tight and hence the yields are likely to stay at those levels before another rally towards the end of March / early April.

With CRR cut led infusion of liquidity, there is a high possibility that OMOs would reduce, thereby increasing the uncertainty on the gsec yield front. Market would now focus on the impending budget announcement for the borrowing for next year. Hence Gsec yields may be sluggish in the run up to the budget, and could inch up gradually in the near term. Hopes of repo rate cut would keep the yields in a range

Expect equity markets also to react positively to this news. Banking sector is also likely to have a good innings when the markets open for trade on Monday.

Thanks,
Gaurav Agarwal
Head Dealer
DENIP Consultants Pvt Ltd