Repo cut for now, govt spending key to CRR cut: Experts

Consensus over a repo rate cut is building and analysts believe the Reserve Bank of India will ease the key rate by 25 basis points in its last mid-quarter policy review of this fiscal on March 19.

Ashish Parthasarthy of HDFC Bank feels that the central bank may only opt for a repo rate cut without a cash reserve ratio or CRR cut.

Also read: SBI eyes CRR cut along with repo to pass on benefits

The liquidity deficit is temporary in nature and the RBI will be eyeing government expenditure post April before deciding on a CRR move. He also expects deposit rates to come off next quarter onwards.

Robert Prior-Wandesforde of Credit Suisse also does not expect an excessively dovish statement from the RBI on Tuesday. Going forward, he is looking at a 100 basis point rate cut in the rest of the year.

Here is the edited transcript of the interview on CNBC-TV18.

Q: What are you going with? Do you think considering the liquidity issues that everyone is raising, Rs 1 lakh 70 thousand crore is what the interbank market is borrowing from the Reserve Bank, do you think a CRR cut may also some tomorrow?

Parthasarthy: Our house view is that we will just have a repo rate cut and no CRR cut. The liquidity deficit is temporary in nature. The RBI would wait for what kind of government expenditure will happen post the advance tax in the first half of April. In our view, I think the RBI governor would wait till the next policy before deciding on the CRR move.

Q: Will he at all be worried about the fact that the mid-March hike in diesel prices did not come as promised? That puts some question mark on the ability and the willingness of the government to deliver on the fiscal deficit target. In the case of diesel prices, it also directly impacts the current account deficit. Won’t that be an issue when he announces tomorrow?

Parthasarthy: There are two parts to it. The mid March diesel hike has not come. Some hikes have come earlier. It will be too early to say that the diesel price hikes have stopped. There could be a tactical measure and you could always have a diesel price hike sometime later in March. That’s one part of it.
 
It will definitely play on the governor’s mind but, I don’t think one diesel hike not coming would weigh on the decision making. I think he would rather look at a trend over a period of time and then decide whether the fiscal deficit targets are likely to be met or not.

Q: The diesel price hike that was scheduled for Friday did not come through. Will it weigh on the Reserve Bank and will it raise some questions about the willingness of the government to deliver on the fiscal deficit and therefore, the current account deficit issue? Do you think the Reserve Bank will go ahead nevertheless and cut rates tomorrow?

Wandesforde: I think they probably will. There are obviously a few uncertainties. One of them is the action over high CPI numbers and obviously high WPI number. But, I am not hearing anything from the RBI which would suggest that they are going to wait.

I think the government deserves a pat on the back given its progress from public finances. I think the weakness of growth above all else must be a huge shock. It has obviously been a huge shock to us. I am sure it must be a huge shock to the RBI and the weakness of the core element of the WPI. I think all of those things are going to outweigh the negative news and we will get 25 basis points reduction tomorrow.

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Q: The 10 year bond yield is at 7.86 percent. If we only get a repo rate cut of 25 basis points and secondly if we get a repo plus a CRR cut, how do you expect the bond yields to move?

Parthasarthy: If there is a CRR cut, I don’t think it is viewed very positively by the market in the sense that it reduces the need for Open Market Operations (OMO). So you have to weigh it against that. But, I think the general expectation in the market is for a 25 basis point cut and I don’t think bonds would react to just a 25 basis point repo rate cut.

They should be in the same vicinity where we are seeing them today. It would reasonably depend on what language is used in the policy. Is there a reasonably dovish or hawkish language or is it the same as we have seen before? If it is the same as we have seen before, we should see bonds rangebound. The other events which will impact the bond yields would be the announcement of the government’s borrowing program.

That would be a bigger factor in the direction of bond yields. The next factor is obviously what are they likely to do with percentage of bonds allowed to be kept in the Held-To-Maturity (HTM) category. That’s another factor which is prevailing. These two issues will be more important than just a rate cut.

Q: On the tone of Reserve Bank’s statement, do you think they will sound very dovish? In any case, how many rate cuts can they possibly deliver given the fact that deposits have stopped coming at lower rates in India?

Wandesforde: My guess is that the statement is going to be as usual, it will be reasonably balanced. It is not going to be wholeheartedly dovish for the reasons that we have talked about. That would certainly be a major surprise.

I am not sure whether we should necessarily read too much into that if it indeed is the case and is a fairly balanced statement. I am sure the forward looking element like future interest rate moves depend on development of growth and inflation and there is slightly greater emphasis now on growth rather than inflation.

I myself think we are going to get another 100 basis points of rate cut and that is a view I have had for a year now and I didn’t see any particular reason to change the 25 basis points. Hopefully, tomorrow there will be 25 basis points in May and then 50 basis points during the remainder of the calendar year. If somebody has said three months ago or certainly six-nine months ago Indian GDP growth was going to be 4.5 percent and we are going to have a repo rate at 7.75 percent, I think he would look a little surprised to say the least.

It seems to me that policy is too tight. I think we can blame a lot of the weakness in growth on too tight policy. Originally, monetary policy but of course now backed up with the impact of all the fiscal tightening as well.

Q: Do you expect the transmission of the rate cut to get diluted if we get a 25 basis point repo rate cut because of the current tight liquidity?

Wandesforde: It won’t be fully passed on and it is another reason why the central bank will be doing eventually more rather than less. Ultimately, they do want to presumably see commercial banks lending rates down by an amount which will have an impact on lending growth. But, I would be really surprised if the whole lot would immediately pass through.

Q: SBI chairman was on record about a couple of weeks ago when he raised the deposit rates saying that depositors have given us a very clear indication and they are not going to come for less. What is the utility of this rate cut or even the next? How much will get passed on you think? How much does money get cheaper, say for a car buyer or for that matter an SME borrower?

Parthasarthy: My view is slightly different. I think money will get cheaper as we move forward, especially as soon as we enter April. Credit demand has been weak. You will see lending rate cuts being passed on. It may not happen immediately after the rate cut but, I think it may happen when we get into April.

Q: Do you think we are going to see in FY14 a crunch in bank margins?

Parthasarthy: I think deposit rates will also come off. We have seen this every year. The January-March quarter is always tight for deposit. Deposit rates may remain elevated in this quarter and therefore, as soon as we get into the next quarter, you will see deposit rates also coming off.