Indian banks' liquidity to move from negative to neutral

It will progressively release INR750-800b in the system.

Maybank Kim Eng reported that the RBI cut the repo rate 25bps to 6.5%. More importantly, it announced a series of measures to ease systemic liquidity.

"In our view, these measures will result in effective transmission of rates. We see treasury/deposit rates heading lower in coming months. RBI maintained an accommodative tone in the policy statement. Upside risks to inflation remain from the 7th pay commission handout and weak monsoon. We maintain our forecast of a further 25bps decline, if monsoon is normal."

Here's more from Maybank Kim Eng:

Liquidity easing measures announced
RBI had kept liquidity in the banking system negative since 2010. Today it announced a policy to move towards neutrality in liquidity. It will release additional funds for banks to meet growth.

Also, the policy rate corridor between repo, reverse-repo and marginal standing facility (MSF) has been reduced from 100bps to 50bps. It will result in a 50-75bps decline in short-term rates.

Short-term rates to fall; Loan growth to get a boost
Moving liquidity from negative to neutral will progressively release INR750-800b (1% of NDTL) in the system. Also, lowering the interest rate corridor will bring down the interest rates at short tenure by 50-75bps. 

We don’t expect a severe impact on banks’ NIMs, as the cut in deposit rates will help protect NIMs. Currently the banking system is growing at 10-11%, which we expect will pick up to 12-14% in FY17 as lower interest rates boost demand.