Rate Cuts and Stimulus Package

Fiscal Stimulus

Fiscal Stimulus, as we often hear the word reflected in the press as well as Indian Markets and often being used in US, India has come to focus yesterday as RBI acted with a second Stimulus Package to boost liquidity into markets and also to reduce the burden on the Banks to provide adequate  money to borrowers.

Courtesy : Business Standard 

Rate Cuts

CRR, or the proportion of deposits which the banks set aside, will cut 50 basis points — the lowest since February 2006 — from the fortnight starting January 17 to inject additional liquidity of Rs 20,000 crore into the system.

The move also helps banks earn income since RBI does not pay interest on funds set aside for CRR requirements.

The reduction in the repo rate, or the rate at which RBI lends money to banks, to 5.5 per cent and the reverse repo rate, the rate at which RBI absorbs liquidity from banks, to 4 per cent are applicable with immediate effect, the central bank said in a statement.

“Banks should price risk appropriately and ensure that quality enterprises continue to get funding". RBI  appreciates that risk management is difficult even in normal circumstances; it is more difficult in an environment of uncertainty and downturn.

This is the fourth round of rate cuts announced by the central bank since the global credit crisis intensified in September following the collapse of US financial institutions led by Lehman Brothers. Since October, CRR and the repo rate have been lowered 350 basis points each. In the past four weeks, the reverse repo rate has come down 200 basis points.

RBI wants to ensure that there is ample liquidity in the banking system. The CRR cut will help soften the cost of deposits, which would encourage banks to lend with more comfort towards both retail and corporate borrowers as quoted by a banker.

Courtesy : Business Standard

Fiscal stimulus II eases India Inc's access to money

The first stimulus package cost the government around Rs 31,000 crore — including additional plan expenditure of Rs 20,000 crore and a 4-percentage-point cut in excise duty. No further fiscal measures like tax cuts will be announced in the current financial year.

The combination of monetary and fiscal steps taken this fiscal would result in additional credit of Rs 56,000 crore in the fourth quarter.

Freed pricing norms for overseas borrowing: The package announced in coordination with the central bank freed overseas borrowing norms from interest rate caps that were fixed to the London Interbank Offered Rate (Libor).

“Removing the artificial cap on ECBs will help infrastructure developers and overseas investors arrive at better pricing,” a head of  investment bank.

Increased refinance for infrastructure: IIFCL, which was designated to act as refinancer for loans to the core sector, is being allowed to borrow Rs 30,000 crore by issuing tax-free bonds — three times more than the initial sanctioned amount in first week of December. This will enable additional infrastructure financing of Rs 75,000 crore over next 18 months.

Allowing the IIFCL to borrow more money from the market will help banks disburse more funds for infrastructure, helping companies achieve financial closure for key projects, Sethi said.

But some analysts think this alone might not be anough. “The key challenge is what rate of interest IIFCL will raise the money from the market,” said  CFO of a construction firm. “If the cost of borrowing is high, then the cost of downstream financing will also be high,” he added.

Exporters unhappy: For exporters, the government tried to tackle the twin challenges: lack of credit and making Indian products competitive in overseas markets.

To this end, the government restored the Duty Entitlement Passbook (DEPB) scheme to pre-November levels, enabling exporters to claim a higher amount of tax paid on imports used to make exported products.

Secondly, the RBI will provide a credit line of Rs 5,000 crore to Exim Bank, which will provide export credit at a time when financial institutions have developed a risk-aversion to lending.

Will update on more news after the Stimulus and Market reactions shortly.