ICICI Sec sees another 25 bps CRR hike in June

A Prasanna, Chief Economist, ICICI Securities, expects another 25 bps CRR hike this quarter. “In fact, this 25 bps which they announced looks to me to be half measured. They will take it over its logical conclusion by announcing another 25 bps hike probably in June.”

Excerpts from CNBC-TV18’s exclusive interview with A Prasanna:

Q: There was much more than the CRR hike itself from Dr YV Reddy. What were your key takeaways? Did you get the feeling that Reddy is going to be protective of growth hereon?

A: Overall, the tone seem to be a bit dovish compared to what the market had expected. RBI had led us to believe their own rhetoric. There are still signs that they are worried about growth and inflation. On the growth side, their estimates at 8-8.5% is probably a bit higher than what they themselves internally would have arrived at.

RBI is probably lacking as a cheerleader for the economy. They do not want to affect business and consumer sentiments. That is the reason why maybe they are pegged the growth rate at 8%-8.5%. If you read the policy closely, they have mentioned that it is a continuous assessment. Based on incoming information, they are ready to act that clearly to my mind means that inflation is pretty much in the scanner. If in the next one-two months, the headline number does not behave in line with their expectations, further actions are possible.

Q: What is your own expectation of CRR doses or reverse repo, repo rate hikes for the year? What do you expect they might do?

A: I expect another 25 bps on CRR this quarter. In fact, this 25 bps which they announced looks to me to be half measured. They will take it over its logical conclusion by announcing another 25 bps hike probably in June. Further hikes in CRR are possible. At this point of time, I do not want to speculate on that because they have got the MSS tool and now maybe the focus could be on trying to suck out liquidity through MSS.

On rates per se, there is reluctance on the part of RBI right now to touch rates, given that they are worried about growth. If headline inflation moves up from here, there is a possibility in end May and June that it can move up depending on how the global commodities behave. One should not rule out 25 bps in the repo rate. That is only one scenario and it completely depends on how inflation behaves.

Q: We have seen a huge bond rally since yesterday. The 10-year for instance was 8.15-8.17%. Where do you see it settling? Where will it find stability, if you have to forecast a trend for the quarter?

A: This is unwinding of whatever expectations the market had built up going into the policy. That’s why it has got overextended a bit. If you ask me for a more sustainable kind of range, it is closer to 8-8.1%. This is where I see it as a more sustainable kind of range for the next 10 years.

But that does not mean that it cannot stay below 8% for the time being. It also depends on what RBI does with MSS. Probably, they want to do a more measured kind of MSS issuance as scheduled, then the 10- year can rule below 8%. For the quarter as a whole, I would put it in a broad range of 7.92-8.1%.