Welcome move from RBI; need more CRR cuts: JSW Steel

Meeting expectations, the Reserve Bank of India slashed its key policy rate, the repo rate by 25 basis points to 7.75 percent in its third quarter monetary policy review. Along with this, the central bank cut cash reserve ratio (CRR) or the portion of deposits banks keep with RBI, by 25 bps to 4 percent. This reduction will inject Rs 18,000 crore additional liquidity into the system.

Seshagiri Rao, Joint MD & Group CFO of JSW Steel said that the rate cut was anticipated and it is a welcome move. However, he feels the need of the hour would be to inject more liquidity into the system through more CRR cuts. 

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

Q: Mr. Krishna Kumar of State Bank of India (SBI) as well as Mr. Seshadri of Bank of India (BOI) just said that they are both expecting rates to fall, both deposit and lending rates and probably 25 basis points. What are your first thoughts? If this is the impact that the credit policy is likely to have on your money and my money are you a happy man?

A: The expectation before yesterday was that the rate cut would be to the extent of at least 0.5 percent, but after RBI’s yesterday’s policy release it was indicating that it can be in the range of 0.25 percent. But, it is welcome that they have at least cut 0.25 percent, even though the need of the hour today is to have more cuts in interest rates and more cuts in Cash Reserve Ratio (CRR).

When the liquidity shortfall in the market is over Rs 100,000 crore, as an industry we are seeing a huge liquidity constraint in the retail market and also small and medium enterprises (SMEs). It is quite evident and it is also decreasing the demand to a large extent. Therefore, injection of more liquidity is the need of the hour once again. So CRR cut of 0.25 percent even though is welcome, is not adequate in my view.
 
Q: Do you think life will become somewhat easier if the borrowing cost for you ancillary makers, SME makers, for any of your buyers and suppliers falls by 25 bps? Even companies like you and especially other infrastructure companies are ridden with debt. Will this somewhat make balance sheet management easier for you?

A: It is a feel good factor as far as this cut of 0.25 percent is concerned, but what is very important is how quickly and swiftly this will be transmitted to the borrowers by the banking system.

Banks have been reducing the deposit rates in the last few months. We are not seeing a huge amount of cut as far as the borrowing rates for the borrowers are concerned. When the RBI has already cut 0.25 percent, there can be more cuts in future, this transmission to the borrowers by way of lending at a lower rate is what is required right now.

Q: It is quite possible that in the run up to March, you are likely to get another cut from what the Governor is saying as of now. He has indicated a limited possibility of rate cuts, so another cut is certainly in the work. What do you think will be the bearing on your interest cost itself and will that spur you into spending a little more on capex?

A: Today as RBI has indicated in their policy document, there is an output gap. So there is a capacity in every sector, but there is not enough demand in the marketplace. These capacities can be used to the full extent only when the demand picks up.

How can demand pick up? Demand can pick up only by creating enough liquidity in the marketplace through monetary policy and also by reducing interest rates which can be affordable to the consumer. So these are very, very important steps. Capex is next one where investment cycle would come back and where fiscal policy also should support the monetary policy to achieve it.

As on date, in every sector, we are seeing capacities being created, there is no pricing power with the industry and at the same time demand is not there in the marketplace. So demand potentially is there, but that is getting reduced because monetary policy is not supporting, because liquidity is not adequate in the system and the interest rates are unaffordable.

Therefore, there is a need for RBI to look into these aspects and take more steps in pumping liquidity in the market and reducing interest rates is very, very important.