RBI to hike CRR by 50 bps; Gilt rates may rise: Experts

Shailendra Jhingan of HSBC Asset Management and Rajiv Anand of Standard Chartered Mutual Fund spoke in an exclusive interview with CNBC-TV18.

Jhingan expects the Reserve Bank of India, RBI to hike CRR by 50 bps. There could be a hold on policy rates, he added.  

Rajiv Anand expects an increased issuance of T-Bills. Gilt rates may go up, he added.

Excerpts from CNBC-TV18’s exclusive interview with Shailendra Jhingan and Rajiv Anand:

Q: What is your sense of what the bond market is pricing in at this point for the April 30 from the RBI?

Jhingan: I think the consensus view continues to be that RBI will go ahead and raise CRR by 50 bps. Of late, I have seen some views that even the repo rate might go up. But we take a slightly different view on that. Our sense is that this inflation needs to be put in perspective - a large part of this inflation is coming from supply side from things like food prices going up and oil prices going up about which anyway RBI cannot do much. But where obviously the RBI should be concerned, is the fact that the money supply growth is at 21% whereas in order to achieve 8% kind of GDP growth you require an M3 growth of somewhere in the region of 17%-17.5%.

So I think what RBI would do is on the liquidity side, they would need to hike the CRR by 50 bps whereas on the policy rates, they can stay put. This reminds you of sometime in 1997-1998 when inflation had been going up because of food prices RBI had stayed on hold even at that point of time because the view was that all this supply side problems which come on inflation take a while and as the new crop arrives sometime in May-June probably inflation will start coming down by itself.

From a slightly longer-term perspective, we think that the economy is going to slowdown - there are leading indicators that industrial growth is slowing down and even the equity markets coming down is obviously going to have an impact on the aggregate demand in the economy. So putting things in perspective and the fact that monetary policy always lags - the action on the economy always comes after six to nine months; I think the RBI should take a forward looking call and most probably on the policy rate side they would be on hold but we still think that there would be a 50 bps hike in CRR in order to bring the money supply down.

Q: What do you think if indeed there is only a CRR hike and not a repo hike would it still be construed as a tightening signal by the banking system?

Rajiv Anand: I think by and large, I agree with Shailendra Jhingan. In fact, I would probably go one step further and broadly believe that even a CRR hike is not a done deal, it is probably a 50:50. To put that into perspective; last year, we have got a CRR hike pretty much on April 1 because what happens in the first week of April is that the government typically spends anything in the region of about 60,000-80,000 crore, which is basically the seasonal government spending and that is what bothers or from a liquidity perspective is what the RBI basically looks to suck out.

What they are trying to do this time is, they have upped the T-bill auction size from Rs 500 odd crore to Rs 3,000 crore and an MSS auction of Rs 5,000 crore. So clearly what they are trying to do is suck out the liquidity not necessarily through a CRR, which they could have already done - they do not need to wait till the policy to do that but rather through measures, which includes short end T-bills. What this does is it transfers the cost of sucking out the liquidity to the government rather than a CRR hike, which in turn would have led to a higher PLR or higher housing rates and so on and so forth and in an environment where growth is slowing that is probably not the route that the RBI wants to take.

So therefore, the government is going to spend what it needs to spend. But I think that will get sucked out through the auctions - there are about Rs 50,000 crore worth of auctions over the next couple of months which will put pressure on the gilt curve. Also, you would probably will see increased issuances of T-bills at the very short end.