By -
Jun 15, 2012
India’s biggest fund managers say
the central bank needs to cut lenders’ reserve requirements to
revive economic growth as cash shortages in the financial system
enter a record eighth month.
The “excessive focus” of policy makers on curbing inflation could limit access to funds that companies need for expansion, according to Reliance Capital Asset Management Ltd., the nation’s second-largest money manager, which oversees more than $14 billion. Reducing the ratio of cash that banks have to set aside is a “more critical issue” than lowering borrowing costs, according to ICICI Prudential Asset Management Co., which manages $12.3 billion.
Lenders’ borrowing from the central bank, a measure of cash shortages, was 824 billion rupees ($14.8 billion) a day this month, above the 600 billion rupee maximum limit favored by the Reserve Bank of India. Benchmark yields dropped two basis points in June to 8.36 percent as economists predict that policy makers will cut borrowing costs next week. Similar yields rose three basis points in China and six basis points in the U.S.
“More than cutting rates, there has to be a change in stance on liquidity to boost growth,” Amitabh Mohanty, the Mumbai-based head of fixed income at Reliance Capital, said in an interview on June 13. “This is the right time to ensure that there is a surge in liquidity, because the overall sentiment surrounding the economy is very poor.”
State Bank of India, the nation’s largest lender by assets, expects a 1 percentage point cut in the reserve ratio because of the cash crunch, Chairman Pratip Chaudhuri told reporters in New Delhi on June 12. That call isn’t the consensus, with only five of 22 economists in a Bloomberg survey predicting the Reserve Bank will reduce the proportion by 50 basis points to 4.25 percent on June 18.
The monetary authority will lower the repurchase rate, at which it lends, by 25 basis points to 7.75 percent, the survey showed.
“I would prefer to see a cut in reserve requirements rather than the repo rate,” Chaitanya Pande, the Mumbai-based head of fixed-income investments at ICICI Prudential, said in an interview on June 13. “It will remove the stress on banks to borrow at any rate.”
Yields on three-month certificate of deposits, which represent the cost of bank borrowings, were 9.05 percent today, 105 basis points, or 1.05 percentage points, above the central bank’s lending rate.
The yield on the 8.79 percent bonds due November 2021 rose two basis points to 8.36 percent today, paring the decrease for this quarter to 23 basis points. The premium over similar- maturity U.S. Treasuries has shrunk 47 basis points this month to 643, according to data compiled by Bloomberg.
Rupee-denominated securities returned 4.6 percent this year, the best performance among 10 Asian local-currency debt markets monitored by HSBC Holdings Plc. That was 208 basis points more than what investors got from South Korean notes, which saw the second-highest increase.
“It’s a trade-off between growth and inflation,” Killol Pandya, the Mumbai-based head of fixed-income investment at Daiwa Asset, said in an interview yesterday. “As things stand now, there is only an outside chance of a CRR cut as it will immediately contribute to inflation. I’m not unduly bullish on the RBI easing monetary policy.”
The rupee weakened 0.2 percent to 55.7050 per dollar today. It advanced 0.7 percent this month. Only the Philippine peso, South Korea’s won and Thailand’s baht have fared better among Asia’s most-traded currencies.
Slowing growth in bank deposits requires Reserve Bank action, according to ING Vysya Bank Ltd., the local unit of the biggest Dutch financial services company. Savings at lenders rose 14.13 percent in the year through May 25, below the 16 percent growth projected by the monetary authority for the current fiscal year.
“I don’t see how the RBI, without easing liquidity, can target deposit growth” above what it is now, Shailendra Bhandari, the Mumbai-based managing director and chief executive of ING Vysya Bank, said in an interview on June 13. “I fully agree with the SBI chairman that there is a need for a reserve- ratio cut,” he said, predicting a 25 basis point reduction.
To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net
To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net
The “excessive focus” of policy makers on curbing inflation could limit access to funds that companies need for expansion, according to Reliance Capital Asset Management Ltd., the nation’s second-largest money manager, which oversees more than $14 billion. Reducing the ratio of cash that banks have to set aside is a “more critical issue” than lowering borrowing costs, according to ICICI Prudential Asset Management Co., which manages $12.3 billion.
Lenders’ borrowing from the central bank, a measure of cash shortages, was 824 billion rupees ($14.8 billion) a day this month, above the 600 billion rupee maximum limit favored by the Reserve Bank of India. Benchmark yields dropped two basis points in June to 8.36 percent as economists predict that policy makers will cut borrowing costs next week. Similar yields rose three basis points in China and six basis points in the U.S.
“More than cutting rates, there has to be a change in stance on liquidity to boost growth,” Amitabh Mohanty, the Mumbai-based head of fixed income at Reliance Capital, said in an interview on June 13. “This is the right time to ensure that there is a surge in liquidity, because the overall sentiment surrounding the economy is very poor.”
Repurchase Rate
Lenders borrowed 914 billion rupees on average from the central bank every day in the past year, compared with 608 billion rupees in the prior 12 months, according to Reserve Bank data. M3, which includes currency in public circulation and bank deposits, rose 13.7 percent in the year through June 1, below the monetary authority’s projection of 15 percent.State Bank of India, the nation’s largest lender by assets, expects a 1 percentage point cut in the reserve ratio because of the cash crunch, Chairman Pratip Chaudhuri told reporters in New Delhi on June 12. That call isn’t the consensus, with only five of 22 economists in a Bloomberg survey predicting the Reserve Bank will reduce the proportion by 50 basis points to 4.25 percent on June 18.
The monetary authority will lower the repurchase rate, at which it lends, by 25 basis points to 7.75 percent, the survey showed.
Funding Stress
Reliance Capital and ICICI Prudential, the nation’s third- largest fund manager, say the Reserve Bank should cut the reserve ratio by 50 basis points. HDFC Asset Management Co., which oversees $16.2 billion as the biggest money manager, declined to comment.“I would prefer to see a cut in reserve requirements rather than the repo rate,” Chaitanya Pande, the Mumbai-based head of fixed-income investments at ICICI Prudential, said in an interview on June 13. “It will remove the stress on banks to borrow at any rate.”
Yields on three-month certificate of deposits, which represent the cost of bank borrowings, were 9.05 percent today, 105 basis points, or 1.05 percentage points, above the central bank’s lending rate.
The yield on the 8.79 percent bonds due November 2021 rose two basis points to 8.36 percent today, paring the decrease for this quarter to 23 basis points. The premium over similar- maturity U.S. Treasuries has shrunk 47 basis points this month to 643, according to data compiled by Bloomberg.
Rupee-denominated securities returned 4.6 percent this year, the best performance among 10 Asian local-currency debt markets monitored by HSBC Holdings Plc. That was 208 basis points more than what investors got from South Korean notes, which saw the second-highest increase.
Growth Trade-Off
Accelerating inflation may prevent policy makers from cutting the cash reserve ratio, according to the local unit of Daiwa Asset Management Co., which oversees about $143 million. Wholesale prices rose 7.55 percent last month from a year earlier after increasing 7.23 percent in April, a commerce ministry report showed yesterday. The economy expanded 5.3 percent in the three months through March, the slowest pace since 2003, government data showed two weeks earlier.“It’s a trade-off between growth and inflation,” Killol Pandya, the Mumbai-based head of fixed-income investment at Daiwa Asset, said in an interview yesterday. “As things stand now, there is only an outside chance of a CRR cut as it will immediately contribute to inflation. I’m not unduly bullish on the RBI easing monetary policy.”
The rupee weakened 0.2 percent to 55.7050 per dollar today. It advanced 0.7 percent this month. Only the Philippine peso, South Korea’s won and Thailand’s baht have fared better among Asia’s most-traded currencies.
Deposit Growth
Credit-default swaps on State Bank, which protect the debt of the lender against a default, fell one basis point this month to 381, according to CMA, which is owned by CME Group Inc. and compiles prices quoted in privately negotiated markets. Some traders consider the bank a proxy for the sovereign. The swaps pay face value if a company fails to adhere to debt terms.Slowing growth in bank deposits requires Reserve Bank action, according to ING Vysya Bank Ltd., the local unit of the biggest Dutch financial services company. Savings at lenders rose 14.13 percent in the year through May 25, below the 16 percent growth projected by the monetary authority for the current fiscal year.
“I don’t see how the RBI, without easing liquidity, can target deposit growth” above what it is now, Shailendra Bhandari, the Mumbai-based managing director and chief executive of ING Vysya Bank, said in an interview on June 13. “I fully agree with the SBI chairman that there is a need for a reserve- ratio cut,” he said, predicting a 25 basis point reduction.
To contact the reporter on this story: V. Ramakrishnan in Mumbai at rvenkatarama@bloomberg.net
To contact the editors responsible for this story: Sandy Hendry at shendry@bloomberg.net
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