Jul 10, 2012 06:25 PM IST | Source: CNBC-TV18

RBI's focus on inflation makes easing difficult: StanChart

Ananth Narayan, MD, Global Markets Co-Head of Wholesale Banking, South Asia Standard Chartered Bank feels that the RBI's clear focus on inflation makes easing difficult. However, there is a little hope for some easing to revive growth prospects.

Ahead of the Reserve Bank of India's credit policy review on July 31, expectations are building up that key rates are unlikely to be moved this time. Ananth Narayan, MD, Global Markets Co-Head of Wholesale Banking, South Asia Standard Chartered Bank feels that the RBI's clear focus on inflation makes easing difficult. However, there is a little hope for some easing to revive growth prospects.

"Given the focus of inflation, which has clearly come out since the last policy, our expectations are reasonably well pared down now. The fact is liquidity has improved over the last few days. So it doesn't look therefore as if RBI will oblige us with either a rate cut or a CRR cut," he said in an interview to CNBC-TV18.

Also read: Bankers ask RBI to cut CRR to boost PAT

Meanwhile, yesterday bankers have met RBI's representatives placing clearly their demands for a cash reserve ratio (CRR) cut. Bankers say a CRR cut would help boost banks’ profit after tax (PAT).

Here is an edited transcript of his comments. Also watch the accompanying videos.

Q: What did you make of the noises coming out from the pre-policy meet? After the last disappointment, are you going in with low expectations for the policy?

A: Yes, we have tempered our expectations of a rate cut or a CRR cut for that matter. With the slowdown in growth and the stress in the corporate sector evidenced by the high level of gross NPAs and the high level of restructuring in the banking system, it doesn’t warrant a situation where we have a liquidity shortage. We would rather see the overnight rates move between the corridor of repo and reverse repo and liquidity being neutral rather than in deficit. Obviously, we also think lower rates would help in that sense especially since credit growth is below 20%. The fact there is a lot of the credit growth is actually going into refinancing.

So we are looking for some kind of relief coming in from monetary policy perspective to revive those animal spirits which Dr. Manmohan Singh talked about and also give us some relief in terms of actual cost. Given the focus of inflation, which has clearly come out since the last policy, our expectations are reasonably well pared down now. The fact is liquidity has improved over the last few days. So it doesn’t look therefore as if RBI will oblige us with either a rate cut or a CRR cut.

Q: The rupee had pulled back quite a bit after going past 57. But in the last couple of days, it has started slipping again. Where are the pressure points this time?

A: We will remain volatile depending on what happens globally and the fact is euro is looking reasonably weak at the moment. It’s stable for the last couple of days, but that’s up 1.23, clearly it’s a lot weaker than it was and we will move in tandem to that extent. Clearly, some recalibration of our expectations is happening. With oil prices remaining below USD 100 for sometime now, we expect the balance of payments to be a lot better than we expected. So from a small deficit, we could actually have a balance of payment surplus in this fiscal if things go our way.

This allows us to believe that rupee should strengthen from here in a slight manner maybe move towards 55 or 54 by the end of this year. But the fact also remains that as long as Europe remains volatile and as long as we have these big headlines coming out from there, we will be subject to the global risk-on risk-off yo-yos.

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Q: What kind of impact would you expect to see on the yield if the call for the bond market is now that there is nothing going to come through in the next policy meet?

A: I guess a few things are going on both sides. On the positive side, for bonds, there is a liquidity improvement, which is palpable right now. Second is we had the quarter end. We had SLR demand coming through in the last few weeks which should sustain some demand. Also, there is expectation that FIIs will come in and try and buy bonds to fill up the quota which was auctioned last week.

There are some sources of bond buying coming through. On the other hand, the biggest source of bond buying has been OMOs. This might be subdued in the next few weeks and months because liquidity has improved. Since liquidity has improved, we might see less bond buying coming through from the RBI. So I expect bonds to remain in a range.

Currently, the new bond is about 8.15%. We could see a weakening bias on prices coming through little later because of lack of OMOs coming in the system, so maybe an 8.05-8.30% kind of range for the 10-year bond.

Q: The stock market has set its expectations on some aggressive policy moves post the presidential elections. What have the money markets starting pricing in?

A: I think expectations of a rate cut are reasonably muted right now in the money markets, but what it does expect is continued improvement in liquidity. One big expectation the bond markets and the money markets have is clarity on the withholding tax.

If you see the new limits which have been auctioned, we expect a lot of buying to come in into that. If we do see follow-through on what seems to be the promise i.e. a clarity in a lower withholding tax not just for ECBs, but for corporate bonds as well.

So we are hoping for some significant move there. Barring that, there is an issue of reviving animal spirits and getting the growth back into the system. Clearly, the India story is linked to the growth story.

 If we see optimism coming back to the India growth story, we should see better flows coming into capital markets, into the currency markets as well. So that should be good news all across. We are waiting for more concrete steps to actually come through from Delhi in that direction.

Q: How closely are the money markets watching the monsoon situation?

A: It’s one of those liquid oxygen kind of cases. A bad monsoon means higher inflation, which actually means monetary policy shows no signs of easing. At the same time, it also means very poor numbers for growth. So it pushes us into a further morass of low growth and high inflation.

As of now, like the rest of the country, we have our fingers crossed and hoping that monsoons do recover from here and El Niño doesn’t set in eventually. But it does look like we will be in for a phase of a bit of high inflation and low growth for a while now.


 

 

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