SLR cut will have no material impact: Economists

Mumbai: The recent one percentage point reduction in statutory liquidity ratio (SLR) of banks will have no impact either on the liquidity front or on interest rates but will only harden the bond yield, feel economists.

Siddhartha Sanyal of Barclays India also said the SLR cut will be ineffective in the near-term. "This reduction, in principle, increases banks` resources that are lendable to the private sector by Rs 65,000 crore. In reality, whether such an increase in lendable resources translates into higher lending depends on a host of other factors," he said.

Noting that currently the banking system is holding excess SLR equivalent to over 4 percent or over Rs 2.5 trillion, Sanyal said given subdued business confidence, weak capex and poor risk appetite, an immediate uptick in banks` credit disbursals appears unlikely.

Citi India chief economist Rohini Malkani said the 100 bps SLR reduction should reduce "forced" demand from banks by about Rs 65,000 crore a day.

On July 31, the RBI surprised everyone with leaving all the key rates unchanged and slashed the SLR, which is the money banks keep invested in government bonds and other notified instruments by 1 percent to 23 percent. This was the second SLR reduction since 2010, when in last October the RBI brought down the ratio to 24 from 25 percent.

Notably, banks on an average hold 29 percent of their deposits in SLR which fetch 7.75 to 8 percent yield but without any risks like lending to corporates.

Kotal Mahindra Bank chief economist Indranil Pan said the SLR cut will have no impact in the short-to-medium term as the SLR holding in the system averages at around 30 percent, well above the mandate.

"There will not be any immediate benefits out of the SLR cut because given the growth outlook, credit rise is expected to soften from the current momentum. And with the risk of NPAs rising, banks may be hesitant on taking higher exposures to the private sector, implying that the investments into government risk-free securities are unlikely to come off," Pan argued.

But he admitted that the move will has already hardened the 10-year benchmark bond yields. "Upside risks to bond yields however exists in the medium term, consistent with our call of fiscal slippages," Pan said.

Similarly Malkani of Citi also said it will impact the bond movement though it may not be as big as the headlines would suggest.

The muted trend in credit growth, positive carry of longer dated bonds are likely to incentivise banks to hold on to their current bond unless they see a pick up in credit growth, said Malkani.

Nomura India chief economist Sonal Varma said the SLR reduction is only symbolic measure to ease liquidity and smooth credit flows to the productive sectors of the economy.

Morgan Stanley India economist Chetan Ahya opined that the SLR cut indicates that the RBI recognises the stagflation-type environment in the economy with weaker global growth environment, coupled with higher risks to domestic growth, which it has revised down to 6.5 percent.

Deutsche Bank chief economist Taimur Baig said the SLR cut is only a symbolic gesture as most banks hold much more liquidity in government bonds voluntarily.

However, Bank of America president & India country head Kaku Nakhate hailed the SLR cut saying given the global volatility, the high external debt, deterioration in the net international investment position, wage inflation and poor monsoons, this will encourage banks to reduce lending rate to the corporate world including SME to some extent.

"The move will also help the economy in short-term, it needs to be followed up by government policy actions to invite foreign flows, FII and FDI, by clearing the hurdles to encourage infrastructure development in our country," he said.

Deloitte India senior director Anis Chakravarty also described the move as a bold step, although he said the move may not show any significant impact as liquidity conditions have been already eased out since the April policy.