Status quo on rates disappointing, says Arundhati Bhattacharya

The RBI said it will withdraw its decision to force banks to park all the excess deposits they got in the wake of demonetisation with it as part of non-interest-earning cash. The surge of deposits at banks will help them reduce lending rates.

Bhattacharya said that there has been a slowdown in loan growth post demonetisation and it will take some time before the loan growth returns to pre-demonetisation levels. Below is the transcript of Arundhati Bhattacharya’s interview to Ritu Singh and Shereen Bhan on CNBC-TV18.

Ritu: What are your first thoughts from what you have heard from Governor Patel just a few hours back, not cutting the interest rates, lowering the growth forecast figure maintaining consumer price index (CPI) inflation at 5 percent, rolling back that CRR for that matter? What is your biggest takeaway?

A: Going to the RBI monetary policy, it was a bit of a non-event. Most of us had thought that 25 basis points was given and many of us, including me, we were routing for a even higher number. So the fact that there was no change was definitely a little bit of a disappointment, but I suppose, what was on their minds could probably have been 2-3 things. The Governor talked about inflation, so probable what he could have in mind is the fact that oil prices looked to be going up. Secondly, certain commodity prices have also stabilised, though frankly, if you look at the numbers and internally what we have looked at it, it does not appear that inflation is showing any upward kind of a bias. Secondly, probably he may have had the exchange rate in mind given the fact that a Fed rate hike is almost certain, though he did say that the Fed rate hike has already been factored in. But that could have played somewhat, had some weightage when this decision was taken by the Monetary Policy Committee (MPC).

But other than that, one thing that which is definitely apparent to all of us is the fact that in the near-past, there has been massive demand destruction. And it is important at this point of time to get demand back up and for that the economy does need priming up. And, that is one thing that the rate cut, it may not have meant anything really material immediately in the sense that banks are really not dependent too much on market borrowings other than the fall of yields. So, other than that, it may not have had any impact. But it would definitely have had a very good impact on sentiment. So, to that extent, the market is a little disappointed, but I hope, given the fact that liquidity is very ample, that we will still see a downward bias on rates and that the yields will drop.

Shereen: As you pointed out, that the street is disappointed because the expectation was that 25 was a given, if not more than 25 and some were even hoping for a 50 basis point cut. But let me ask you about the decision on the CRR because when the notification had come in from the RBI, because I remember, you had joined us on the channel and you had said that you would need to think 100 times now before transmission. But given the fact that the RBI has very clearly said that the incremental CRR of 100 percent will stand withdrawn starting December 10, what can we truly expect as far as transmission is concerned and does this now ease some of the concerns that you had?

A: Yes, it does definitely address some of the concerns. We are very relieved that this additional burden that had come onto us, that has been taken away. I wish something could be done for the fortnight past when that burden continued, but I do not think we have got any relief from that. But at least going forward, we are very glad that this burden has been reduced. And as I said, the ample liquidity is something that is going to drive rates down. So to that extent, once this burden is taken away, we will definitely be seeing some kind of lowering of rates going forward.

Shereen: What could that lowering of rates amount to? And also if you could give us some sense, you were talking about compensating banks for that fortnight, what could be the implications as far as your bank itself is concerned because we have not seen the RBI provide any relief at least prior to December 10?

A: As I said, there has not been anything from the RBI regarding that period. I do not really know whether they would consider anything or not. For instance, paying interest on CRR, they have repeatedly told us it is not something that can be done. And it is not allowed by an act of parliament. But parliament is also something that can be approached for that particular period and for this particular amount of CRR also. If the Central Bank wishes to give us something for it, I do not really know whether they would. But this is something that could definitely be considered given the fact that the banks have really played a human’s job in getting this entire demonetisation exercise through. There has been a lot of expenses that we have had to incur. So, to that extent, probably, a little relaxed view on this would be something that the banking sector would immensely appreciate.

Having said that, as I said again, at this point of time, this is not permitted by law, so I do not really know whether this can happen. But, going forward at least the fact that they have taken this burden off, that is something that is really well appreciated.

Shereen: If I could ask you as far as growth itself is concerned, because I heard you talk about demand destruction, the RBI on its part, has lowered its FY17 gross value added (GVA) growth projection from 7.6 percent to 7.1 percent. But you have now had some sense of the impact of demonetisation on the ground. What would your own estimate be in terms of growth and what do you make of the RBI number?

A: Internal research indicates that there would not be a huge fall in gross domestic product (GDP). But if you look at opinions across the board, people are expecting a fall between 1 and 2 percent. At this point, for me really, I have not made up my mind because as I said, these days are very different days. They are not normal days and as the cash supply gets restored into the economy, we may see a very quick rebound of demand. Having said that, this is something on which opinions are divided, even internally opinions are divided as to when that rebound will happen, whether it will happen within a quarter, two quarters or maybe a little more. I would like to think that it will happen quickly enough, but again this is a question. It is a situation none of us have ever seen before. So, very difficult to make any proper predictions as to when it will happen.

Q: But if I could ask you what the situation is as far as cash supply itself is concern, because there were pointed questions repeatedly asked to the governor as well as the deputy governors in terms of cash supply and while obviously the Reserve Bank will say that printing is at full capacity and all efforts have been made to provide cash and at this point in time 19 billion notes pieces have been put back in the system is what Deputy Governor Gandhi had to say. What is the situation on the ground because lines continue outside of ATMs we are given to understand that just about 30 percent of ATMs are loaded daily with cash, it is not just an urban problem rural India continues to face the brunt as well. What is the cash supply situation and I would imagine that the banking infrastructure is facing the brunt of it if it is not?

A: There are two things that I would like to mention here; first and foremost is that we are getting cash on a daily basis and at least where our ATMs are concerned most of them are running full till through the day. The second thing I want to say basically it is not that people have not got cash, but there is a scarcity syndrome and this scarcity syndrome leads to hoarding, tendencies to hoard so people who don’t normally keep cash at home even they are actually drawing Rs 24,000 per week and keeping it at home and not really circulating it.

The other problem that is arising is that today we have mainly Rs 2,000 and Rs 100. Now to handle Rs 2,000 and give change, say you spent something like Rs 600 you have to be given change of Rs 1,400. Now counting out 14 notes is a very difficult proposition. Normal people make mistakes if they have to count notes beyond 6, so 5 or 6 notes counting is very easy, counting 14 notes is not easy. As a result what happens is people neither buy nor do they want to use the Rs 2,000 notes.

Similarly, with Rs 100 notes people have a tendency to hoard them, just in case there is a requirement and they don’t have small change. Now what will change this entire equation is the entry of the Rs 500 notes. Already Rs 500 notes have started coming to all our branches. In fact, most of the ATMs are now getting stocked with Rs 500. Hopefully, by next week we will have enough Rs 500 to start giving them out at the bank counters as well. Once the Rs 500 comes in it will act as a span breaker between the Rs 100 and the Rs 2,000 and until the span breaker comes in, it is going to be very difficult for people to spend either Rs 2,000 and Rs 100, so I think what is really the point over here is how soon will the Rs 500 be able to be produced in quantity enough for people to feel comfortable and the second thing is for these limitations to go away. These are the two things that is going to restore normality. I think the first one the Rs 500 supply come first and the second one later, but once these two things go I think things will go back to normal pretty quickly.

Q: Can you explain to us what the situation as far as deposits themselves are concerned today, there seem to be confusion even on part of the Reserve Bank I am not sure whether this data that the Reserve Bank is presented is as of yesterday or is as of the last count which could perhaps be when the Reserve Bank last put out an official number, which was on the November 27, but what is the deposit figure as far as State Bank of India itself is concerned to date?

A: The deposit figure would entail some amount of double counting, which is why we are not giving out deposit numbers. Frankly deposit numbers have 2 or 3 elements for instances the post offices and urban cooperative bank also deposit at our counters into current account, so they get double counted if you are taking their number as well as taking ours. Similarly, the deposit numbers also has some amount of new notes coming in, which should not be considered in the deposit numbers. Therefore, I think it is better not to consider deposit numbers they actually could be quite misleading.