India: RBI Acts Again, Cuts SLR, CRR, Repo rate

Sunday, November 02, 2008

As expected, RBI increased liquidity with the following measures:

  • SLR down 1% to 24%,
  • CRR down 1% to 5.5%,
  • Repo rate down 0.5% to 7.5%.
The very next day we had the following headline in Business Standard:
Warning that MFs and NBFCs with an exposure of Rs 630,000 crore could crumble under high interest costs, CII President K V Kamath today asked the government to save the crucial financial sector to save the economy. (Mr Kamath is not ususally given to hyperbole-Lee).
Expect many more easing of interest rates and liquidity conditions over the coming weeks and months.

Another article caught my eye in BS, Time to Invest? This gives the impression that perhaps we should start the whole article and it is rather scary...for example:
A downside still seems probable however. It may appear unlikely that there will be a systemic collapse. But it may just happen if a big real estate developer goes bust and that takes down a major bank or housing finance major, which has exposure to its projects.
The debt burdens and forex exposures of companies that have tapped the FCCB market could explode through the next couple of financial years.

Expect RBI and government to continue opening the liquidity spigots; however, I do not expect this to prevent some liquidity event. Too many companies are stretched and it would be a miracle for it all to work out; I do not believe in miracles.

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