By R Jagannathan
Every decision of the central bank creates winners and losers. On Monday, the Reserve Bank of India cut cash reserve ratio (CRR) rates for banks by 25 basis points (or 0.25 percent). Here’s a laundry list of who benefits from it and who doesn’t.
Let’s start with the losers first.
Savers: The decision to increase liquidity at a time when there is no great demand for credit means more banks will cut deposit rates, since they will have more cash from the CRR cut to lend. Savers will lose since inflation is still rampant, and could rise higher as the diesel and cooking gas price hikes feed through to the price indices over the next few months. The saver is always the biggest loser from deposit rate cuts at a time of high inflation.
The old: Since the old and the retired tend to be savers and the young borrowers, the CRR cut will shift the balance of economic power away from the old to the young. This is fine in a young nation, but it also means less incentive for higher savings – a prerequisite for higher investment and growth.
Banks: Banks will be the biggest beneficiaries of the CRR cut, which will release Rs 17,000 crore in the first instance. CRR deposits earn no interest – and are thus banks’ biggest chunk of non-performing assets. The State Bank alone will save Rs 200 crore through the CRR reduction. The Rs 17,000 crore money saved can now be deployed in loans or investments, and over a year, the CRR benefit will multiply four or five times as the money that is released keeps coming back as deposits which need less CRR maintenance. Over a year, it means over Rs 65,000-70,000 crore of free money for banks. CRR cut is a more effective way of signalling easy money than a repo cut.
Government: The real big (and undeserving) gainer will be the government, which is borrowing money hand over fist. The reduction in CRR will enable banks to invest in government securities at a time when corporate credit growth is not growing too much. The repo rate cut would have sent a signal of falling inflation: the CRR cuts helps the government more directly by making it cheaper to borrow from banks. Banks are happy to lend since loans to the sovereign are risk-free.
Borrowers: Corporate and individual borrowers will gain when banks start lowering home loan, auto loan and corporate lending rates. The big companies already pay very low rates, so they will gain less, but medium and small scale sectors will benefit more.
Stocks: Share prices and interest rates are inversely related. The current euphoria in the stock market is related to the fact that the UPA government is at last moving on reforms. But, if and when the RBI formally shifts to a lower interest rate regime – and it seems only a matter of time – the markets will have even more reason for bullishness.
Bonds: Existing holders of government or listed corporate bonds will benefit since their prices will rise to bring yields down to match current interest rates. If one assumes that rates have peaked and have nowhere to go but down, buying bonds or debt funds is a good option. Tax-free bonds offering yields of 7.8-8 percent (NHAI, PFC, REC, etc) are the best bets since these can be bought from the market.
Real estate: There will be marginal gains in real estate if the coming rate cuts entice enough people to start buying property. But property markets are still too rigged and too high to really rise. So realty is still an iffy proposition.
Gold: Easy money is always a trigger for gold to rise higher. But this may be tempered by the revival in stock markets. Investors will move money where they think they will get the best returns, and hence smart money could move to stocks in the short run and to gold only as an after-thought.