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Jul 12, 2012, 08.23 AM 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.

Ananth Narayan

Co-Head of Wholesale Banking- South Asia

More about the Expert...

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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READ MORE ON  Ananth Narayan, RBI, credit, policy, crr, rate

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