'Economic policy report not fully dovish; CRR cut seen'

Excerpts from India Business Hour on CNBC-TV18 Watch the full show »

Shubhada Rao, chief economist, Yes Bank believes that Reserve Bank of India's (RBI) macro economic policy report is less hawkish , though it is not completely dovish and expects a CRR cut tomorrow.

 In an interview to CNBC-TV18, Rao said, "We have been advocating our cut in CRR of 50 basis point for quite sometime now because the systemic liquidity remains in deficit mode and significantly higher than what RBI perhaps has it's comfort zone of 1% of the net demand time liabilities."

Meanwhile, Rao expects inflation to slide below 7% by March-end.

Below is the edited transcript of Rao's interview with CNBC-TV18. Also watch the accompanying video.

Q: The Reserve Bank sounds a lot more dovish than it has in the past several policies, the focus clearly seems to have shifted from inflation management to one of growth and concerns related to growth, given this context do you expect at least a CRR cut tomorrow because the street is divided on that?

A: Quite right. It is less hawkish I would say, perhaps not completely dovish because they have said that growth risks have accelerated, while inflation risks have not ebbed as much as they would have perhaps liked them to. While on the balance clearly the focus may shift more on growth and with inflation still yet on the radar, a repo rate cut is completely ruled out.

We have been advocating our cut in CRR of 50 basis point for quite sometime now because the systemic liquidity remains in deficit mode and significantly higher than what RBI perhaps has it's comfort zone of 1% of the net demand time liabilities. Quite clearly there is a chance of a cut in CRR or alternately they could even explore an option of giving a kind of a calendar to open market operations.

Having infused about Rs 70,000 crore through OMO, the systemic liquidity still remains in deficit mode of almost 1.3 trillion. Now there is currency in leakage perhaps on anvil. Typically, with a run up to elections you do see some currency leakage getting heightened. If that is the case we could see liquidity deficit getting slightly worse from even the current levels and as a proactive measure RBI could mull over a cut in CRR upto 50 basis points. That would release about Rs 30,000 crore.If we look at about the current levels it is well above 1% of what the comfort zone is, so there is a chance of CRR cut.

Q: Coming to the growth related risk that the Reserve Bank talks about in the macroeconomic review, it says that the Euro area appears to be heading for a recession, world economy though unlikely to enter recessionary phase, but domestic growth is moderating more than what was expected. In terms of the forecast, what do you see the Reserve Bank saying on the growth front tomorrow?

A: There are two factors, which dampen the prospects on growth. One quite clearly the external demand that is a global conditions remain weak and likely to get worse of perhaps in the coming months, so to that extent our exports become and remain vulnerable. Second and more importantly, is the investment demand.

While consumption has remained fairly undisrupted, it is the investment demand, which looks hampered be it through business confidence surveys or capital formation data in GDP or high frequency data on capital goods. All seem to suggest that it is the investment demand, which is in a much softer patch, in fact in a negative zone. That is why most of us have revised our growth forecast slower from 7.5% plus to closer to 7%. RBI is in tandem - in an agreement with most of the forecasters is what I would like to believe.

Q: It says inflation is beginning to fall in line with projections. It also says that core inflation and exchange rate are going to be important for rate actions, how would you read that comment?

A: The reason why we do believe that core inflation going forward may have some kind of declining trajectories is rupee has come off from those 54-55 levels to now close to 51 levels. That going forward will have some kind of a salutary effect on the core inflation sequential momentum. But it is still an uncertain world, RBI does not want to absolutely come out quite rightfully so in terms of giving a likely trajectory for inflation.

Likewise even in food, vegetables and other perishables may have eased, but protein inflation remains fairly firm, so these are the few factors. You look at the fuel prices, perhaps post state elections we could see another round of domestic fuel price rise. Now these are the factors, which are difficult to ignore in building our assumptions on inflation going forward.

Having said so, on balance we still believe that probably by end March our inflation could go below 7%, perhaps close to about 6.6% or thereabouts. If that does indeed pan out, RBI obviously cannot ignore inflation and more so core inflation, the concerns would definitely be more on growth and how to facilitate growth. We are of the camp that believes that CRR cut could and would facilitate some of the trigger in terms of investment.