Dec 17, 2012 10:09 AM IST | Source: CNBC-TV18

No compelling reason for RBI to cut CRR in Dec: CLSA

Rajeev Malik of CLSA finds no compelling reasons for the central bank to cut CRR in December.

RBI is scheduled to announce its mid-quarter monetary policy review on December 18. The market was always expecting a CRR cut from RBI to symbolically support growth; but the lower than expected inflation number has increased the expectation.

Seventy percent of bankers and economists we polled expect RBI to cut CRR by 25-50 bps. Only 30% expect RBI to keep CRR unchanged.

But most don't believe that the RBI will cut the policy rate. In fact 90% said no repo cut. However, there is unanimity that rates will be cut at least by January. A majority expect 25-50 bps cut before the end of this financial year.

All respondents expect RBI to signal a pro-growth stance on Tuesday sounding dovish in its policy stance. The most important finding of our poll is that 40% of those polled expect FY13 inflation to end below 7%.

Rajeev Malik of CLSA finds no compelling reasons for the central bank to cut CRR in December.

Though the November WPI was much lower than expected at, but one cannot look at WPI in isolation. The retail consumer price index (CPI) has edged up in November. Reserve Bank of India (RBI) should give more weight to the CPI inflation simply because it is a better representation of the inflation experienced by households, he elaborated.

However, like most other economists Malik also sees greater probability of a rate cut in January 2013. Meanwhile, he expects India to grow at the 6 percent in FY14.

Below is the edited transcript of Rajeev Malik’s interview with CNBC-TV18.

Q: Inflation momentum is definitely falling. October over September it grew by just 0.2 percent and now November over October it is flat. Should not the Reserve Bank cut rates?

A: Not at all. What you are referring to are the non-seasonally adjusted monthly numbers which I wouldn’t really give much credence to. The most sensible thing looking at month on month changes comes from seasonally adjusted data. That still showed headline rising above the 0.3 percent on the month. Not a big number, but still an increase.

Secondly, one cannot look at the Wholesale Price Index (WPI) inflation report in isolation. The retail consumer price index (CPI) is sitting in stratosphere and is edged up in November. Reserve Bank of India (RBI) should frankly be giving more weight to the CPI inflation simply because it is a better representation of the inflation experienced by households. There will always be pros and cons, lets do a crude way and take an average of the two inflation rates.

That will show a number that is close to around 8.6 percent unchanged from the prior month. So, a rate cut next week - there is really no compelling reason for RBI to rush into it at all.

Q: In that case would you believe that there is a scope for a CRR cut. That in any case is what the market is expecting. Though I personally think a Cash Reserve Ratio (CRR) cut actually can be even more inflationary?

A: I agree with that assessment that a CRR cut is a much more effective tool than a policy rate cut. Of the two, a CRR cut has a higher probability, but to be fair if one looks at the underlying reasons for the Liquidity adjustment facility (LAF) shortage, it has a lot more to do with government maintaining large cash balances with the central bank.


So, it is not necessarily because of underlying primary liquidity deficit as such. Quite frankly not a very compelling reason for RBI to cut on CRR, but to be fair this has been the issue before as well and it has still gone ahead and cut. So, may be a compromise is going to be a 25 basis point on CRR. Looking strictly and speaking objectively at the underlying drivers of liquidity, it should not really happen.

Q: How do things stack up for January you think?

A: There is a much greater probability of a rate cut in January. One of the reasons why I would still not pencil in a rate cut next week is the WPI series in India tends to be rather volatile. There have been periods when WPI edged lower for two, three months and then suddenly jumped up.

Given what is happening to retail CPI, RBI can easily wait for another month. If the numbers still look good or the trend looks well behaved, that opens up some room for it to act in January. Just because RBI meets every six weeks, is no reason that it has to act at every meeting. When you play cricket you don’t hit a six on every ball.

Q: The IIP even after adjusting for the base was better than people expected. There are also some positive pro-active steps from the government. Have we troughed out on growth?

A: Short answer is yes. The fact that industrial production (IP) was 8.2 percent is at least in my assessment not really any reason to celebrate. If I were to tell you that November IP is actually going to contract year-on-year, would you then change your assessment? Our own calculations show that the run rate of industrial production in the December quarter, the current quarter is roughly around 1.5 percent. That really doesn’t tell you that there is any meaningful pick up happening.

It is a bit better than the prior quarter which is where there is an low level consolidation taking place, stabilisation, which will give way to better numbers by the time we get into early next year. Secondly, lot of the activity from a real economy perspective, the most relevant one is really on the Cabinet Committee on Investment as it is called now. How effective it is going to be? It remains to be seen, how quickly it becomes operational etc.

We are better off with it than without it, but India can’t just rest on a recovery scenario based on that because what is announced and what is implemented in India are often two different worlds. Still it will add to the broader momentum, but we are still looking at, at least in our assessment about 6 percent average growth for FY14 and ending the year touch above that number. There will be an improvement, but hold your horses. This is not going to be a rollercoaster up move.

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