RBI steps good sign for eco, but repo rate may rise: HDFC

The Reserve Bank (RBI) on Monday decided to cut the marginal standing facility (MSF) rate by 50 basis points (bps). Reacting to the central bank’s moves, Keki Mistry, vice chairman and CEO of HDFC sees short-term rates to lower going forward. Even long-term rates will be higher, which is a good sign for the economy, he tells CNBC-TV18 in an interview. 

He expects the MSF to come down further, but the repo rates may be hiked. With good monsoon and harvest season, headline inflation may come down now. But, the excess liquidity via FCNR deposits in November will push inflation higher and so, the repo rates will be hiked by 0.25 percent, Mistry adds. Also read: See lower short term rates; MSF cut as indicated: Axis Bank Below is the edited transcript of his interview to CNBC-TV18. Q: What material difference is a cut in the marginal standing facility (MSF) going to make? A: It makes an overall difference in the economy. Short-term rates will come down. As short-term rates come, down the yield curve, which in India has been inverted or flattish for a very long period, will start correcting. Short-term rates will be lower, long-term rates will be higher. In any developing economy that is a good sign. Anyone who is borrowing money in the short-term market will clearly see a 30-40 or maybe even 50 bps drop in funding costs. Q: What is this actually now going to mean in terms of what we could see from the RBI in future announcements? The governor had very clearly articulated that the MSF is going to have to do most of the walking. What do you now expect from the governor in the next policy? A: There are two ways to look at it. One is the MSF rate has to come down still further and possibly the repo rate could go up by 25 bps. Why would the repo rate go up? The primary reason would be inflation. Inflation last time came in at 6.1 percent. Whilst the number may seem a little bit concerning, core inflation was up 2 percent. The numbers were driven by food. With good monsoon, harvest season round the corner, hopefully food prices will come down. Headline inflation number will also come down, but at the same time there is the foreign currency non-resident (FCNR) deposits where we could get in very sizable amounts of money coming into India. When all that liquidity suddenly comes in a short period till November that excess liquidity in the system could push inflation higher. In anticipation of that I would not rule out the possibility of a 0.25 percent increase in repo rate. Q: Do you believe that the MSF will be redundant by the end of October? A: I would think it would be far less meaningful even going forward than it has been in the past. The increase in the MSF rate in July was not really going to stem the rupee depreciation. If the objective was to get more money through debt then I don’t think one should have expected too much money if you see the currency depreciating. If the currency is depreciating, people from overseas are not going to put money in India just to get a 2 percent higher rate. So, MSF rate over a period of time will become lesser and lesser meaningful. Q: Do you see any visible impact at all as far as the consumer is concerned. Besides what has happened today by the RBI we also heard from the finance ministry and the finance ministries decision or move to try and alleviate some of the pain that the consumers are facing specifically as far as two wheelers and the consumer durable sector is concerned. This business of lending at lower rates for particular sectors combined with that and the move by the RBI today, do you really see any significant difference as far as consumption is concerned? A: I don’t see this particular interest rate making a material difference as far as consumers are concerned for the simple reason that to my mind consumption, it hasn’t slowed down just because interest rates are 0.25 percent higher than before. In reality, interest rates are not even 0.25 percent higher because the general increase in the interest rate after the MSF was introduced or was increased by RBI in July has barely been between 10-25 basis points. That is not going to render a person efficient to borrow money to buy some higher consumer item or anything of that sort. It is more to do with the fact that the inflationary pressures were there. People were feeling pinch and that could have resulted in a bit of a slowdown. However that is a temporary phenomenon that will change.