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Stimulus, Rate cuts And More


We have yet another stimulus package!

Rate cuts: The RBI has cut rates by another 100 bps – repo is now at 5.5% and reverse repo at 4%. (These are rates banks pay to borrow from the RBI and get from the RBI for keeping cash there)

The Cash Reserve Ratio – percentage of deposits kept with the RBI – is now down another 50bps to 5%. Should add 20,000 cr. to the system, but that is just theory.

Bond yields fell off the charts – the 10 year yield is at 5.07%. My Gilt fund investment is now up 14.5% in two months.

Interestingly, the RBI says that while it has cut repo from 9% to 6.5% since mid September 08 (now 5.5%), PSU banks have only cut their PL from about 14% to about 12.5%. The pressure is serious.

The full text of the monetary stimulus shows RBI is no longer concerned with inflation; more emphasis is given now to the IIP negative growth figure, a slowdown in services and lack of business confidence.

India’s Subprime: RBI also has “relaxed” the classification of certain loans as NPAs. If a loan to Commercial Real Estate or equity market or personal loans is distressed, it can be restructured to make it look better. But some freedom’s been offered to a working capital loan – which earlier needed to be fully secured with collateral, and will now not require such collateral; the bank will only require to have 20% of it provisioned.

Plus, banks acn implement a restructuring within 120 days of starting it (and it has to be started by Jan 31). That’s a 30 day extension.

Amounts to basically saying we have distressed loans, we will restructure and perhaps back-load payments (charge no interest for a while and later charge higher). Further we may not require to have collateral that is valued as much as the loan. Uhm. Where have I heard this before?

Steel and Cement: There’s duty on TMT bars and cement, brought back after inflation forced the government to take em off. Yet, these prices are likely to fall at least 40% more this year, I think.

Bond easing: FIIs can now invest in rupee based Indian corporate bonds upto $15 billion (up from $6 bn earlier). That’s good, but hey, these guys aren’t even investing in AAA bonds in their home countries. So we’ll just to wait and see.

Some other areas include some recapitalisation of PSU Banks – to the extent of 20,000 cr. and some ECB usage permissions for real estate.

This isn’t much, again. The government is seeing serious revenue losses but is balking at borrowing more (look at these bond yields! Might as well borrow when people are buying) Granted, our debt is at 90% of GDP or so, but we can scale it to 100 or 120% in these times; everyone else is doing it. Get a 500,000 cr. package and that will be worth it. The measures – except the rate cuts – are of little significance.


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