RBI may ease, see 50-75 bps rate cut in FY13: ING Vysya

Economists are still building hopes that the Reserve Bank of India will ease soon and may cut rates in the credit policy review on July 31 itself. The central bank has been blamed for not focusing on growth with gross domestic product (GDP) of the fourth quarter touching 9-year low. Some economists even feel that Fitch slamming India has also been trigged by RBI's inaction.

However, Shailendra Bhandari, MD & CEO, ING Vysya Bank is not too pessimistic and feels that RBI will ease rates at some time. He feels that there may be a rate cut in the next credit policy. In an interview to CNBC-TV8 he said that the repo rates may be cut in the range of 50-75 basis points in FY13.
Nevertheless, tight liquidity concerns still overhangs the economic situation and RBI action can fix it. Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video. Q: The thing about yesterday's commentary is that a lot of people now expect to see nothing in terms of action for the second half, given what the RBI said about commodity prices, about the monsoon. Would you go with that?
A: In a way obviously, I think most of us were surprised that nothing happened yesterday. But if you look back say 20 days ago, before the GDP and the IIP numbers had come out, no one was actually expecting anything this time.
If 20 days or a month ago you had asked most of us, we would have said that we expect interest rates, repo rates to come down by 50-75 bps over the rest of this financial year. There could be another CRR cut of 25-50 bps again during the next 9-10 months and I think we have gone back to that scenario.
Right now, it's probably being just too pessimistic to say that nothing will happen. The reality is that the RBI has noted core inflation is down and they have linked it to demand. There will be reason for them to act and I am personally of the school of thought that doesn't rule out something happening as early as July. Q: What is the liquidity situation on the ground right now and what did you take away from what the RBI said about continuing OMOs. Did you get the feeling that they are considering CRR as a liquidity unleashing tool in the near future or they are content with the liquidity picture and OMOs will suffice for the moment, according to them?
A: I think it's not just the OMOs. The fact is that they did inject a greater amount of liquidity through export refinance. So they are equating that to a 0.5% cut in CRR. To that extent, they have injected liquidity but the fact is that liquidity is very tight. Right now of course, there will be some impact of the advance tax outflows but, even if you look at a more normalized scenario over the last two years, I don't recollect a single day when banks were not borrowing from the repo window.
I think most days, it has been over the 1% target. Even if you look at the deposit growth for last year, forget about the March number which is 17, but if you look at March 23 before the window dressing, it was around 13-14. The reality is that liquidity is tight, deposits are growing slowly and the RBI does need to do something.
As of now, I am counting export refinance as virtually as good as the CRR cut. I have a slightly different view on OMOs because I think OMOs tend to drive the prices of bonds up, yields down but they don't really add too much net liquidity because you could anyway have reput them in the first place. Q: Want to ask you about deposit rates going forward for the rest of the year because consumer price inflation is 10.4% now, urban CPI is almost 11.5%? Given that and given inflationary expectations of households, particularly in cities, do you think you have a persuasive case to cut down deposit rates for the depositor very aggressively even if the RBI were to give you signals?
A: The reality is that deposit rates is almost a free market, it's a comparative market. As I mentioned, deposits aren't growing at the pace that we'd like to because the real growth is 13-14 and if credit is going to grow at 16-17%, you do need to pick up deposits.
So, comparative pressure is going to keep deposit rates from falling. It means that unless substantial liquidity is added and substantial rate signals are given, it would be difficult for base rates to come down in a hurry. Q: Rates are often a good indicator of what's happening with the growth momentum itself, falling rates would indicate that supply is actually outstripping demand. How worried are you about credit growth over the next few quarters given what has happened with the headline GDP figures and what we are hearing on the ground in terms of growth stumbling?
A: Credit growth happens for several reasons. One of them is simply an increase in working capital which is a function of inflation and the GDP growth and inflation listed at 8 and listing GDP at 6-7%. So 14-15% growth is always there.
If to that you add some capital formation which has been done from bank deposits, you could get to the 17-18 number. I think the key part is that the capital formation is not happening. To get a credit growth of anything over 15-16% would basically mean that the investment cycle has to restart. Otherwise to me, a credit growth of anywhere between 13-15% is just steady. It shows that the economy is growing at 6% with an inflation of 8%. Q: Candidly are you feeling comfortable about the fact that it's going to move that way for the next few quarters, things will be that calm and smooth in terms of credit growth, the follow through impact on the way up in terms of GDP?
A: Actually I don't see any reason to believe that there is a disastrous scenario ahead of us. I do believe, like I said, the RBI at some stage will ease rates. I am also somewhat hopeful that some of the policy roadblocks we are seeing and I am not too hopeful but somewhat hopeful that we might see some momentum.
It is not necessarily as calm as a straight line but, I do see the trend being along the lines of credit growth without capital formation of around 15% and with capital formation it would be around 17-18%.