Expectations from the RBI policy review

April 16, 2012

(The views expressed in this column are the author’s own and do not represent those of Reuters)

With more than 70 pct of the banking market in the grip of public sector banks (PSBs), who have a combination of constraints to lend freely, the Reserve Bank of India’s policy review amounts to almost a strategic push for these PSBs. Thus, the eagerness with which the policy review is awaited.

With discussions around tightened liquidity, slower credit growth and falling IIP numbers, the RBI is literally between Scylla and Charybdis. How can its policy making contribute to an alignment between growth and inflation? So what would be the reasonable expectations from the policy tomorrow? But before that, two quick observations.

During the peak of the financial crisis in the United States, essentially triggered by sub-prime loans, it was discovered that borrowers would prefer to default on housing loans (mortgages) rather than auto loans. This was due to a crash in the real estate market and the borrower’s not being too uncomfortable living out of a car (caravans included). The impact on banks is well known. Out here, thanks to an underpenetrated mortgages market (therefore a less heated market) and the “emotional value” attached to a house, people would have responded the other way around. Hence, any interest rate change in the policy is immediately “tested” with its impact on home loan borrowing rates. So far the growth in this segment has been steady and without any worrisome stress on asset quality.

The Royal Bank of Scotland (in the UK) has been questioned by its owner (the government) as to how much they have disbursed to small borrowers (SME locally) as committed. They are revisiting their strategy. Out here, the SMEs continue to struggle to access finance at acceptable costs.

In conclusion, the policy may nudge banks to “reduce” loan rates and help the retail and SME sector. For the average bank treasury, a rate reduction would see enhancement in the value of securities they are holding and perhaps some profit booking. The challenge is what they can plan for the rest of the year.

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