Here is a verbatim transcript of the exclusive interview with Ashish Parthasarthy on CNBC-TV18. Also watch the accompanying video.

Q: What would you expect from the credit policy at all? 

A: At this point in time, I don’t think it is realistic to expect a big move from the credit policy. The bigger actions have already been taken.

There may be some moves on CRR but that would depend on what the forecast of liquidity is on government spending and intervention they expect to make.

Q:  Yesterday’s press release announcing the repo cut had nothing about growth and inflation. It is primarily concentrated on financial stability. Are there serious solvency problems? Would you relate the fact that the repo cut was not even kept till Friday but announced just four days before the credit policy to the fact that there are still very serious solvency problems with some entities in the market?

A: I don’t think I will put it as solvency problems. There are liquidity and solvency problems globally. In India, it was more of a liquidity issue that could have led to an appearance of a solvency problem.

So, when there is no crisis, you need to take measures to ensure that there is actually no crisis. There are concerns on solvency overseas. But I don’t think that is the case in India.

Q: There are some mutual funds that are a bit worried about some part of their mutual funds, the FMPs for instance. Would the repo rate cut have something to do with it? One can understand liquidity; you cannot wait for a credit policy to ease liquidity. But a repo rate cut?

A: I think to that extent, yes. Mutual funds are also faced with a liquidity problem. They are unable to liquidate their assets.

So, it is part of the same issue. I wouldn’t put it as far as the solvency problem. But I would put it as problems caused by illiquidity of money as well, as of the markets.

Q: Have this slew of steps improved the sale and purchase of CDs and CPs in particular?

A: To some extent, definitely yes.

Q: Even CPs?

A: Again it will depend on the credit perception of the issue. But to the good credit issuers, it has improved a bit. I don’t think it has improved in totality, because there are a large amount of assets with mutual funds.

Banks for the last many months have been faced with illiquidity. Banks are the only entities that can raise liquidity and who are possible buyers of assets. But banks also need to see a period of stable liquidity for them to be encouraged to go out and buy assets. This measures need to take effect.

Q: On the SLR cut, yesterday the government also announced that its expenses are going to mount by Rs 105,000 crore, which were the extra expenses for which sanction was sought. Do you expect in the light of this there could be an SLR cut, since perhaps this indicates to higher market borrowing?

A: The SLR cut if at all it is required is because banks’ balance sheets have been strained. The entire resource requirement of the industry is coming to the domestic market because they are unable to raise foreign currency funds, and in addition they are unable to raise capital market funds. Both markets are down and so liquidity is not available. So, the banks’ balance sheets have been strained and credit deposit ratios are high in order to ease that there could possibly be an SLR cut.

But RBI would not go in for an SLR cut right now. They would possibly go in for more CRR cuts and try to ease the liquidity situation. Otherwise there would be an increase in yields on government borrowing, and an increase in yield on all other assets.

Q: Are you expecting further repo rate cuts? If I have to ask you to forecast the 10-year paper, I understand today if it was trading it would be around 7.5%. Where would you put the 10-year on December 31 and March 31?

A: I don’t think the 10-year would move greatly downward. I think it would be possibly trade in this range. I wouldn’t be surprised if in December it is slightly higher than today’s level. March levels are something that one will have to wait and watch and how much of additional borrowing would come and what the progress in the repo rates is at that point in time. I wouldn’t be surprised if it is higher than 7.5% by December.

Q: Purely because of the pressure of market borrowing?

A: Purely because of the pressure.