Oct 04, 2016 09:44 PM IST | Source: CNBC-TV18

RBI Policy: Tone less dovish as inflation worries continue, says expert

“While the language is cautious, trajectory of CPI will determine further rate cuts,” Anant Narayan, Head - Financial Markets, Standard Chartered Bank says adding that going to 4 percent inflation by March 2018 is looking difficult as of now.

The Reserve Bank of India (RBI) today cut the repo rate by 25 basis points to 6.25 percent. The newly constructed Monetary Policy Committee (MPC), headed by Urjit Patel, gave a 6-0 vote in favour of a cut. The committee has also indicated for accommodative stance in future.

The RBI’s tone has been less dovish than expected, believes Anant Narayan, Head - Financial Markets, Standard Chartered Bank. While the RBI has cut rate, it continues to be cautious on inflation trajectory.

“While the language is cautious, trajectory of CPI will determine further rate cuts,” Narayan says adding that going to 4 percent inflation by March 2018 is looking difficult as of now.

Naina Lal Kidwai, Chairman of Max Financial Services expects another rate cut of 25 bps in December. Considering the downward trajectory of inflation, RBI is likely to go for another cut this year.

For economy to grow, private investments need be the focus, she says adding that this can happen by transmitting RBI’s rate cut by banks. Demand-led consumption will push investments, she adds.

Speaking on transmission of rates by banks, State Bank of India’s MD PK Gupta says that the growth in deposits will pay a crucial role in this.

The banks will have to see how much deposit rates can be reduced from the current 7 percent, he says. However, he adds that transmission of rates is happening every month.

Shilpa Kumar, Head - Global Markets at ICICI Bank says that transmission of bank rates will depend upon the demand and supply of deposits.

Bond markets had already priced in a rate cut, she adds.

Bond yields are expected to go down 25-50 bps further by this year-end, says KVS Manian, Country Head-Consumer Banking, Kotak Mahindra Bank. Manian believes that RBI still has room to cut 25 bps more before the end of FY17.

Below is the verbatim transcript of the interview on CNBC-TV18.

Anuj: If you have heard Latha, I wanted your first reaction on absence of that word - liquidity?

Narayan: The first read from what Latha says clearly this looks like a rate cut along expected lines for the bond market, but with a less dovish baritone, so clearly a little more thoughts brought in. Frankly, some of the concerns brought in on inflation whether it is the March end number or the trajectory in FY18 the next fiscal year are absolutely warranted. The reality is glide path to 4 percent is not very visible right now.

It depends a lot on what happens globally to commodity prices to food prices etc. So, that amount of caution is warranted. On the specific point of liquidity I won’t read too much to be honest because liquidity is already been kept at a surplus level as of now as things stand right now.

Latha: All I want to say is that the word, that statement in the monetary policy action that the liquidity deficit removed as not been reiterated. Secondly, they are continuing to keep the medium-term target of 4 percent both in the statement and in the Monetary Policy Report (MPR). They are quite alive to that 4 percent target as well. However, the more important thing is the absence of commitment to removing liquidity deficit would you take it big?

Narayan: I would say that since they have already removed the liquidity shortage and have effective brought it to neutrality, I won’t read too much into absence of that sentence. Frankly, ever since Dr Urjit Patel has taken over they have been two open market operations (OMOs); there has been a lot of mopping up of dollars as well to bring the core surplus to a rather large number. Today we think that core surplus is over Rs 1 lakh crore, so I won’t read too much on to the lack of liquidity in the policy statement. I think action speaks louder than words.

Ekta: Wanted your thoughts in terms of incremental transmission now, we have got that incremental 25 basis points, how much do you think transmission will be for the industry as well as for State Bank of India (SBI)?

Gupta: If you look at the transmission, since we moved to the Marginal Cost of Funds based Lending Rate (MCLR) regime, the transmission actually is happening every month. If you looked at the last three months, the MCLR has been going down by 5 basis points every month. We have already cut the deposit rates this month also, not only us, most of the banks have already cut the deposit rates also. So, since MCLR does get calculated based on what we offer on our deposits so that part will continue to happen.

Ultimately the question is how much further room is there for the rate cuts? I think that probably we still remain to see how much deposit rates can be cut further. I think we are already at 7 percent so below 7 percent I think it takes some time. We will rather wait at this point of time actually, how the deposit growth also pans out. As you know that the deposits growth also is many decades low at below 10 percent, plus the foreign currency non-resident (FCNR) outflows are going to happen in the next two months so let us see.

I think the transmission is already happening; it should not be so much of a concern actually. If you look at the overall also when we started from a 10 percent base rate, now over one year MCLR is at 9 percent.

Latha: What have you made, you got a 25 basis cut, liquidity is going to remain, that sentence was not there in the policy only because now it is a policy given and deficit is -- neutral liquidity is already there. Is there space to cut?

Gupta: I think the policy is as per the expected lines. As I said earlier, I think the further action will depend on how the whole thing actually pans out. I think the banks have already cut their rates on the deposit side, I think beginning of this month most of the banks have cut rates. The lending rate cut is happening every month; for the last few months every month we have been cutting MCLR by 5 basis points so I think the MCLR cut will depend on the ability of the banks to actually reduce their deposit rates also.

So, the transmission as the governor himself said is happening as far as the large customers are concerned through the money markets, I think the commercial paper (CP), certificate of deposit (CD) rates have been low. So, let us see how it goes actually. I think once the FCNR redemptions are through I suppose then there will be more room for the banks to cut the rates further and then the MCLR transmission will happen.

Latha: What did you read, there is one rate cut, are you looking at space for more rate cuts and how are you looking at the bond trajectory?

Shilpa: This rate cut probably is looking at the supply side factors and what has happened to inflation, I think this rate cut was warranted and the RBI and the monetary policy committee (MPC) seems to have indeed recognised that. I think going forward, I would look at the statement which the governor made subsequent to the policy in which he again said that indeed if supply side factors were to give room that could lead to a change in the inflation trajectory and RBI would take that into account.

I think if you kind of just take a bird’s eye view of what has been happening over the past couple of years, there have been very significant structural supply side changes on inflation front, on competitiveness, on how business is done in terms of infrastructure as well as I would say indeed in the way the fiscal is being organised and the focus on garnering more revenues for the government.

So, I think with all of those supply side changes that are happening, indeed our base case of inflation which is then supported by these factors, I think there certainly could be room for rate cuts going forward. However, the risks that the MPC has pointed out are certainly those that we would watch out for.

Latha: How do you see yields going from now, today it has only been a 1-2 basis points fall in yields despite the rate cut probably because it was discounted? By December 31 do you think the yields can move much further down, another 20 basis you think?

Shilpa: In a sense the bond markets had already been looking at the inflation data and to some extent therefore has taken into account an expected rate cut. I think the way I would put it is bond prices could stay supported but a further movement down from here will really depend on the trajectory and how inflation moves going forward. So, there will be support but how much further downward movement is indeed going to be inflation dependent.

Latha: Where are interest rates, bank base rates headed?

Shilpa: Over the last few months as well as quarters, we have indeed seen the trajectory of bank rates downwards. I think the change that has happened as two-fold. One is that the change in these rates is really dependent on deposit rates and as and when these are changed, sometimes even intra-policy you see results of that passed on both to the MCLR as well as through the base rates. So, I think the big change is like I said number one, demand supply and therefore pricing of deposits, number two is when that happens indeed even intra-policy we can see movements arising out of that.

Latha: I wanted to ask you about the small tweak to the S4A rules. Now the sustainable part of the debt can be counted as standard loan but company still has to have at least 50 percent of its debt as sustainable. You perhaps heard the governor’s statement as well on being constructive about resolution of NPAs. Putting all that together what is your sense, are you going to be better placed to resolve some NPAs?

Shilpa: That is probably better answered by our CFO. All I can say is that at a systemic level given that bank’s capital is in a sense at a premium and the fact that credit really needs to move up to support growth, I think any steps made towards actually enabling more credit and smoothening out passing on of credit to corporates and retail customers is helpful. So, all I can say is any step in that direction is always welcome.

Latha: After the FCNR(B) deposits move out i.e. before December 31, how much can MCLR fall, another 20-25 basis points?

Shilpa: Really hard to give a simple answer to that because it will be dependent on how demand and supply of deposits at that point is. So, it is hard to answer, much easier to take a call on inflation trajectory then to immediately say where that demand and supply will be. I can only say directionally things should ease up.

Latha: What are you anticipating in terms of base rate falls given the rate cut, given the promise that the liquidity will be maintained at neutral? Everything that the governor said, what is your sense? By December 31, could we get a 25 basis rate cut in the system?

Manian: Headed downwards and finally, now the calculations for MCLR is fairly prescriptive and the way people have their formulas. So any change in costs do get reflected in MCLR. And I must point out to you that actually, the rate cuts have been quite significant considering that earlier, the base rate used to be a single tenure rate whereas an MCLR is a multi-tenure phenomenon. And if you see the lower tenure rate that banks offer in their MCLRs, they are significantly lower than what the base rates used to be. And most of the floating rate loans are usually pegged to the three months or one month MCLR.

So, in that sense, there has been a significant cuts in rates from banks and banks for their loans do compete and huge competitions does come from the money market, and as you know, bond rates have been easy all through these last 3-6 months. So, therefore, there have been significant cuts and it has not ended, we still have some room from here for rates to go down and given what estimates of inflation people have, in the fiscal year till March, there is definitely a rate cut. I do not know whether it is December or March, but definitely there is a rate cut before March.

Latha: What is your sense in terms of where the bond yield might be on December 31 or March 31?

Manian: My own sense is that like I said, another 25-50 basis down from here is where I see the bond yields. As I said, 25 basis is the rate cut I see in the policy rates by the time the year runs out and maybe bond markets will think ahead and 25-50 basis points lower.

Q: I don't know if you cared to sit through the press conference. There is a 25 bps cut but further cuts are at the moment a little more up in the air, does this get passed on, will companies like Bajaj Finance be lowering lending rates for their borrowers?

Bajaj: I did see a part of it and yes, we will be lowering it based on our average cost of borrowing as well. So, we have been passing on benefits to our customers those that have the floating rate products and those that are taking new loans from us as well but what is very important to note is that we have to now - and it is there in the statement as well - banks have to pass on the benefit of this.

Banks have been sitting, giving reasons of fixed deposit rates being high etc, savings rates being high but they have to pass on, they have to transmit this and as that happens today a third of our borrowing in Bajaj Finance is from banks and as that happens we will definitely pass this on. We have to see that the end customer benefits from these rate cuts and that is what is going to spur growth.

Q: You all are quite a heavyweight in the Non-Banking Financial Company (NBFC) space. Will you all be cutting rates further to your borrowers, and more importantly do you think rates now have become attractive enough for both consumption and to some extent even to some SME industrial activity to pick up?

Bajaj: So, clearly rates have become attractive enough. For example if we see the last five years consumer durable sales televisions, washing machines, refrigerators there was really no growth and we know that because we account for 25 percent of all sales through our financing. This year for the first time we are seeing growth, we are seeing very close to low double digit growth and that is a positive which means people are buying. In addition to that we have the pay commission money that is starting to come, in that from the armed forces, better monsoons. So, rural growth should start.

So, we have everything right now for significantly better economic growth over the next few quarters and going ahead and I am not going to talk about external negative headwinds that are possible, that may be another question. In this situation I believe that the stage is already set for greater growth and with this 25 bps cut we should transmit it.

I would like to transmit as much of it as I can to the customer but it is for Mr Manian and other bankers and Mr Manian is an old firmed to not hedge themselves with multiple issues, pass it on, help us pass it on and let us see actual growth on the ground.

Q: What did you make of Urjit Patel and MPC's first monetary policy, would you say it has been conservative or more dovish than what you were expecting?

Kidwai: For first policy Urjit has come through exactly as I would have thought. He has clearly been part of a team which looked at inflation closely and inflation numbers have delivered in that they are 100 basis points below where they were earlier. So, there was no reason for both the MPC and the governor to have withheld the rate cut which we see today.

So, I am not surprised to see this happen and in fact I would not be surprised if in December we see another such cut given that at least my expectation is that inflation is going to continue on its way down at least for the rest of this year.

Q: You are expecting another 25 basis point cut in December and by the end of this financial year by March 2017 what would the quantum be according to you that we have room for?

Kidwai: Just another 25 basis point and I would like to believe it would come in earlier rather than later and the reasons I would say is we are seeing food inflation looking very much corrected and on the way down and good monsoon even vegetable prices beginning to correct.

We still have the benefit of so called “oil bounty” which we have benefitted from and the goods and services tax (GST) potentially inflationary cycle depending of course where GST settles given the 3 rates as they are being looked at, but if it were to be inflationary that’s really not going to kick in till the middle of next year.

So, why not take the benefit in early and particularly where we need growth to comeback in and particularly in private sector growth, because if you look at where we benefitted last year was the government translated the oil bounty.

The oil bounty of hike excise tax on oil and low price of oil into very quickly putting it into public investment and we saw public investment grow almost 21 percent and there is no way we are going to be able to keep up that rate of public investment now, if already slowing and the fiscal which is looking strong and good is not going to give enough leeway to the government to my mind to take investment back up to where it has been over the past year.

In that case, we need private investment to comeback in and lower interest rates particularly if there is transmission of these low interest rates to banks which has being a challenge.

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