RBI policy: What bankers expect

The Reserve Bank of India will announce its mid-quarter monetary policy review tomorrow.

According to CNBC-TV18's poll, 70 percent of bankers and economist expect the Reserve Bank to cut cash reserve ratio (CRR) by 25 to 50 basis points. Only 30 percent expect RBI to keep the CRR unchanged. Most don’t believe the Reserve Bank will cut policy rates. Infact 90 percent said no repo rate cut. However, there is unanimity that rate will be cut atleast by January. Majority expect 25 to 50 basis of repo rate cut before the financial year ends. Most respondents also expect the Reserve Bank to signal a pro-growth stance, the change in the language sounding more dovish in the policy stance. The market will look out eagerly for inflation. Forty percent of those polled expect FY13 inflation to end below 7 percent, below what the Reserve bank forecast. That is a little unusual. But it is important that for the last three years inflation has actually been bettering the Reserve Bank’s forecast, despite regular upward revision. In an interview to CNBC-TV18, Abheek Baruah, HDFC Bank, Moses Harding, IndusInd Bank and SS Mundra, ED, Union Bank speak about their expectations from the central bank. Also Read:
WPI inflation to ease further in 2013: CRISIL
Here`s how much inflation has axed your tax benefits in last 6 yrs Below is the edited transcript of the interview. Q: What are you going with? Do you agree with the majority in our poll? Baruah: I think I do. We are broadly in agreement with virtually every aspect of the CNBC-TV18’s poll. We are calling for a CRR cut, given the fact that the liquidity situation is a little tight. We do not expect a rate cut immediately, but one perhaps in January and maybe two over the rest of the fiscal year. Q: Why should we expect a CRR cut? Twenty five basis points is going to give Rs 16,000 crore. At the moment, before the advance taxes were paid, we were about Rs 65,000 crore in deficit. We know that advance taxes today may be a trillion, but it would be more or less coming back into the system. Why waste Rs 16000 crore, anyway we are doing Open Market Operations (OMO)? Is it that they are meeting, so they have to do something? Baruah: I would look at it from two perspectives. One, there is a broad acceptance, even by the RBI, that growth is at shambles at this moment. Without necessarily diluting their inflation stance, they need to send continuous signals that they are supporting growth in every possible way. This is how I read their current or emerging policy stance. The CRR cut means that they have managed to make this distinction quite successfully between a growth focused, but essentially liquidity management instrument and something that is the principal inflation fighter, repo rate. So, I think in order to send the pro-growth signal, they would want to do something that is more permanent, a little more visible, something that drives up more hype than simple OMO. That is somewhat superficial and shallow reason for cutting the CRR. We are in the midst of a long-term liquidity problem, which is reflected in the money supply growth numbers. This requires massive infusion of primary liquidity as well as an increase in the money multiplier. So, given this situation, given the very sedate rate of growth of the RBI’s balance sheet and consequently the banking systems balance sheet, I think they have to keep going at this problem. At this stage, OMOs and CRR cut are warranted. This is a much more significant problem that is going to play on interest rates, the ability of banks to lower interest rates. I would take that very seriously. That gives a much stronger reason to look at things that can increase money supply growth. CRR is certainly one of them.

Q: What exactly is the 10 year yield factoring in at this point in time because from 8.17 percent pre inflation, it has come down even below 8.14 at this point? Is it just a CRR or is there a possibility that a repo might actually come through? Harding: Most of the stake holders are tuned to the fact that the rate reversal cycle is long overdue. Whether it happens in December-January-March it doesn’t matter. So the short, medium or long-term being very bullish, there is a good demand for 10 year above 8.18 percent. Infact 8.18-8.23 percent is a very strong support for strategic investors. So, that is the expectation of rate cut and a shift into growth supportive monetary stance being long overdue, the target for the 10 year is 8 percent. The only risk factor at this stage is cut in the held-to-maturity (HTM) retention limit from 25 percent to the statutory liquidity ratio (SLR) level. So, overall bond market is bullish. When we say RBI is cutting CRR, it is just to maintain the feel good sentiment in the market. When the system is holding 5-7 percent, excess SLR and 1-1.5 percent being funded at the repo counter, I don’t think there’s any merit in doing a CRR cut because it is not going to divert credit to productive sector. The lenders are clearly on risk-off mode, there is no low-risk corporate credit which is priced at very small premium to the government yield. So, lenders are better off keeping the funds in government securities, anticipating a rally that will get a better return on their capital. _PAGEBREAK_

Q: Seventy percent of our respondents said that they expect a CRR cut, only 10 percent said repo cut. Firstly, what do you expect and secondly, how will banks react in the event if there is a CRR cut or a repo cut? Mundra: My expectation at this point would not be a repo rate cut in this particular policy pronouncement, but I will be more interested to listen to the statement which will be accompanying tomorrow’s measure and that will set the tone. So, my expectation is no repo rate cut at this point of time, but a statement containing a very strong expectation of what could be reasonably expected in January policy barring the global uncertainties. Q: What would you do if that was indeed what the RBI Governor, D Subbarao delivered? What is your view on CRR? Mundra: On CRR front, I think 60 percent there won’t be a CRR cut and 40 percent, there will be one Q: So what will you do if there is no policy action at all? And what if there is a CRR cut? Mundra: We don’t expect a repo rate cut at this point of time. In CRR cut, if there is a 25 bps reduction, there would be two possibilities. There is a possibility that we will take the overall situation with a more positive outlook to whether it can be slightly built into the base rate. Having taken that total overall situation, if it is not something that is immediately on the cards or which looks more appropriate at the time of next policy pronouncement, then, the pass through, through some of the further straight realignment which we have been doing with the last policy, would certainly be positively considered. Q: So you expect actual lending rates to fall a bit if there is a CRR cut? Mundra: Yes that is what I would expect it to be. Q: What exactly does deposit growth look like at this point in time and credit growth? Mundra: Deposit growth year-on-year basis is still what we were originally expecting in the range of 15-16 percent. That is what the deposit growth looks like. Credit growth is 17-18 percent. Q: Regarding fiscal consolidation, do you think that there is enough done from October 31 despite inflation showing some amount of a relief and maybe even IIP showing some amount of an uptake? Do you think there is enough done on fiscal consolidation from October 31 to now for them to actually warrant a repo rate cut possibly? Or prepone a repo rate cut? Baruah: I think there are enough intentions in place, but if you emphasise things done in terms of actual measure taken or revenue flows or expenditure reductions, I don’t think it is adequate. That is one of the reasons why we are not expecting a repo rate cut immediately. I think more concrete evidence of actual fiscal consolidation in terms of disinvestment flows, some expenditure reduction, etc will have to come in before the RBI is convinced enough to turn the rate cycle. I believe that if you are optimistic, one could hope that there would be more signs of concrete consolidation coming in by the end of January and that will put the RBI in a position to do this. While the intentions are there but in terms of concrete evidence, no, we do not have enough! Q: In your mind, is there a 40 percent, 30 percent chance of a repo cut being advanced tomorrow? Baruah: I don’t think so. I think they will have to wait a little more before going ahead. There is a possibility of a repo rate cut not happening in January, if some of the numbers turn adverse especially core inflation. The RBI will have to adjust to the base effect and see if it is purely due to the base effect. We have had some comforting, not just in terms of headline inflation but in terms of the components and core The RBI will have to access as to whether this is sustaining or not and whether a fiscal consolidation has progressed on the lines that has been promised. However, if there is a possibility of a major fiscal overshoot, the probability of a repo rate cut will have to be lowered. _PAGEBREAK_ Q: If the repo cut comes, what happens to the bonds? Harding: Basically if you go by RBI’s set benchmark of elevated inflation and low real interest rates, there is no case for rate cut. Q: However, what if it happens? Harding: If you look at policy reforms on fiscal consolidation, government being a minority really, has done well pushing through the reforms. They have not given up the fight and they have a commitment to contain fiscal deficit at 5.3 percent. If the choice between 25 basis point CRR cut and the repo cut, RBI should bite the bullet and deliver the rate cut. Q: What will happen if they cut? Harding: It is going to be 8 to 8.10 percent range on the ten year. Without rate cut, it’ll be 8.10, with rate cut 8 percent. Q: What you are expecting with the commentary from the RBI tomorrow? How do you expect them to be? Do you expect them to be softer going forward or still possibly be a little hawkish with regards to possible upward risk on inflation despite it easing for the past two months- focusing on CPI in particular? Mundra: If the slight possibility of rate cut is delivered, then the more focal point is the policy measure itself which has been delivered. That not being there, if I look at the previous few pronouncements, I feel that the tone will be softer and it will reinforce the indication which was given at the time of previous policy, when it was very clearly articulated that in the month of January the market can look for a policy rate action. So, I think that tone will continue. I also feel that while the mid-reviews are not used for making any significant policy pronouncement generally, but it is not a given. So, may be some policy pronouncement or indication on some of the policy measures, may also get included into this. Q: What would you do if there is a repo cut? You said if there is a CRR cut, there is a good chance that some bit will be passed down. If there is a repo cut what will you do and both on deposits as well as lending? Mundra: If there is a repo rate cut, it is something which every bank and its Asset - Liability Committee (ALCO) has to deliberate and then decide its course of action. If that is done and if it is discussed in ALCO, then I would be a strong voter in ALCO to look for some passing through the base rate impact. If that has to happen its hit will be on both the sides (deposit and lending). Q: Just now you said that your deposit rate growth for the system is 13 percent, credit growth is 17 percent. Do you really have the elbow room to cut deposits? Mundra: I strongly feel that, that possibility would be there. Number one, between the deposit and credit, the growth percentage from the view point of available liquidity in the system, it is not the same thing because the base are different. There is a growth on 100 and there is a growth on 70. So, if policy direction is quite clear that there is going to be a softening, if there is a temporary mismatch between the deposit and credit growth, you plan for it. I think there would be a room for delivering that. To sustain the short term credit requirement, you would also have the excess Statutory Liquidity Ratio (SLR) which is available in the system. So, if I take the view in totality, it would be possible and it would be required to be done, otherwise it will not work from the view point of an overall balance sheet management. _PAGEBREAK_ Q: A quick word with regards to growth argument. Would you argue for or against the Index of Industrial Production (IIP) figure? How exactly the RBI would read it? Would they read it as a glass half full or half empty because it was a possible base effect? Hence, what would their stand be on growth according to you considering that Wholesale Price Index (WPI) has eased? Baruah: I don’t think one month’s IIP data, however spectacular it has been, will influence the RBI’s decision in any way, especially since we know that there is a base effect. Sequentially, it was certainly much stronger than expected, but I think the RBI will take a holistic view of the growth situation. There is broad recognition of the fact that growth is inshambles and despite little blip here and there, we need to push growth up. Hence a strong case is building up for a rate action. The RBI cannot keep ignoring this. The inflation is certainly a constraint, but we are beginning to see comfort creeping in, both in terms of the direction as well as some of the qualitative aspects of inflation, particularly the core number. There was another sort of variable which the RBI explicitly sort of mentioned as an input into its policy decision, which is the fiscal consolidation piece. There would be a little more confirmation on the fiscal consolidation piece by January. So, I don’t think there is any debate on the growth issue. If anyone harbours the impression that growth is picking up or is not in a dire pathetic state, then I think it is a delusion.