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Despite the finmin’s public appeal two days back, the Reserve Bank of India (RBI) governor’s worries over inflation scored over growth concerns and he held onto the policy rates—the repo and reverse repo—though he did try to ease liquidity a bit and shaved another 25 basis points off the cash reserve ratio (CRR) to take it to 4.25%. One basis point is one-hundredth of a percentage point. Some more quick dejargoning here: the repo rate is the rate at which banks borrow from the RBI and is currently at 8%, the reverse repo rate is the rate at which banks lend to RBI and that is at 7%. The CRR, or the money that does no work, is the fraction of their deposits that banks need to keep with the RBI on which the bank earns no interest. Banks do earn interest on the funds kept under the other reserve requirement, the Statutory Liquidity Ratio (SLR) that is currently at 23% of deposits.

As the retail savers, borrowers and investors, we have become accustomed to watching the credit policy numbers as one more set of numbers to digest. While some number watching may be stressful—like looking at the stock ticker on your screen—some of this number watching is good. Those who are tracking the slow easing of monetary policy from the beginning of the year have seen the repo and reverse repo rates cut by 50 basis points in April 2012, following 13 hikes in the previous two years; the bank rate was cut by 50 basis points in April to rest at 9%, the SLR cut by one percentage point to 23% in August this year and CRR cut by 175 basis points to 4.25% effective 3 November 2012. As depositors, the number watchers would have begun to lock in their deposits to benefit from the higher rates in the years ahead. As borrowers, they would begin expecting their mortgage rates to start falling. Retail number watchers can then begin to question their banks if they do not see home loan rates going down soon enough. Rates have dropped by almost a percentage point for new borrowers, but older customers find it tough to get the same advantage even in floating rate loans. Home loan customers in India have seen predatory banking with banks reducing rates for new borrowers but keeping it high for older customers. Borrowers in the older regime of loans linked to the benchmark prime lending rate (BPLR) find it difficult to get banks to switch them to the new base rate system even though the RBI keeps saying that banks must do that. On the ground, it is very difficult to get a bank to switch without paying a large switch over cost. Those on the base rate-linked loans find that banks are much more trigger-happy when rates are going up than when they are going down in moving the base rate. Retail watching of the credit policy numbers may put more consumer pressure on banks to reduce the base rate faster to pass on the benefit.

Number watchers, when they wear the investor hat, are a worried lot when they see no cut in the policy rates. When the eagerly awaited policy rate cut does not happen, markets go into a sulk, like they did on Tuesday, dropping just over one percentage point to 5,597 on the Nifty. Markets like low interest rate regimes for two reasons. One, lower interest rates ease funding of business and keeps growth on track. Two, investors begin to switch lower-return bonds (deposits) for equity when interest rates fall. So how should retail equity investors decode the stickiness of the policy rate right now? Step back from the very recent event and look back at the full year at a glance. As the numbers above have shown, monetary policy has slowly eased over 2012. Markets are up 20% since January 2012, not just in response to this but the overall reduction of stress in the global economy and in India. As markets have got off the floor, well chosen fund portfolios that were showing red for the last few years are now delivering 5-15% returns —despite all the doomsday predictions. It looks like almost the end of the high interest rate cycle and small pointers show a bottoming out of the stress in the economy. If you are a serious long-term equity investor, why would you worry now?

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, and Yale World Fellow 2011. She can be reached at expenseaccount@livemint.com

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