Expect no CRR cut; 50 bps rate cut by Jan-March: Experts

Shubhada Rao, chief economist, Yes Bank, Adi Godrej, President, CII & chairman, Godrej Group and Keki Mistry, vice chairman & CEO, HDFC, share their view on macro economic report and what they expect from the upcoming RBI policy.

Below is the edited transcript of the interview. Q: The RBI governor in the macro economic report today mentioned that as monetary policy needs to continue to be calibrated, inflation continues to be above the comfort level of the Reserve Bank and widening CAD is a constraint on monetary policy easing. How would you then read these statements? Rao: I think the precursor to the tone being set for today's document was quite evident in the earlier statements made by governor a week ago that inflation still remains elevated and it is difficult to disregard the inflation trajectory at this point in time, particularly consumer inflation.
So, in that sense some of the expectation that one was building in looking at the wholesale price index and particularly the core inflation trajectory, that it would pave way for more aggressive easing got toned down by the earlier comments of the governor, these are backed more amply in today's document.
Rightly, he has expressed concerns on retail inflation, widening current account gap and more importantly the point that he has driven home is while there are positive steps being taken by the government on some of these measures to enhance capital flows and attempt to boosting investor sentiment, the ground reality is that probably the consumer and investor sentiment has not adequately been void. I think the governor would deliver only a 25 basis point cut in repo rates tomorrow. However, that is nearly given if you look at the last statement in a publication said that a calibrated approach with focus increasingly on growth risks. So, 25 basis points rate cut is given. Q: In the context of what the governor has said and in a sense he is perhaps tempering expectations, one can't make a correlation between what the macro economic policy says and what the credit policy finally does, but after governor statement, are you also settling for a 25 bps cut and nothing more? Godrej: A 25 bps rate cut along with further cuts in coming months will be good because now it is important to create a growth environment and I hope the Budget and credit policy does that. Growth is the only way to get out of the inflationary cycle. Growth will lead to appreciation of the rupee, which is the best way to fight inflation in our country. Q: Do you believe it will be a 25 basis point cut tomorrow or will it be nothing at all? Mistry: I think the governor will cut rate by 50 basis points between January and March. The question is, is the 50 basis points going to be entirely front loaded or is it going to be two steps of 25 bps each or is it going to be zero now and 50 bps in March. I would probably rule out the last. So, that leaves us with two choices, 25 bps now and 25 bps in March or 50 bps now and probably nothing in March. Q: Let me put an argument that we are hearing in the street and he may throw up a surprise in the way that he won't move on the repo but he will ease liquidity by further cutting the CRR rate. One might in fact see between a 25-50 basis points CRR cut. Do you believe that, that is something that we are likely to see? Mistry: I don't see why he would cut the CRR by 50 basis points because while there is shortage of liquidity in the system he has already cut CRR two times over in the last 3-4 months, I don't really see a CRR cut happening at this time. I would be more inclined to believe there would be an interest rate cut, only question is will it be 50 bps and zero or will it be 25 bps and 25 bps. Q: You mentioned about further cuts through the year, but most people are saying 25 basis point and Mistry says another 25 bps in March and 50 bps that would be enough for some time now given the fact that we are currently seeing inflation continuing to be above the Reserve Banks comfort zone and that the government must deliver on its promise of fiscal consolidation. Can we see the investment cycle and the capex cycle to pick up if we see only a 25 or a 50 basis point rate cut? How much difference would that make from a lending rate point of view? Godrej: I have a different perception. I think inflationary expectations are low and commodities prices are coming down all over the world. If we can ensure that the rupee does not depreciate and in fact appreciates a little from the present level through growth, inflation will be contained. That will be best for the country because growth will create better revenues, it will lead to lower fiscal deficits and it will lead to an appreciation of the rupee and thus containment of inflation. So, we can create a virtuous cycle if we bring interest rates down. We should have at least a 200 basis points reduction during the calendar year 2013. Q: The consensus view is that governor will do a 25 basis point cut tomorrow. What does that mean in terms of lending rates because that is the question that people are asking? Can 25 bps really make any difference to the consumer? Mistry: I am not too sure if a 25 bps cut in rates will immediately translate into lower lending rates unless and until banks follow it up with deposit rate cuts also which I presume in due course they will, but one need to bear in mind that February, March are always two months where liquidity in the system is usually very tight.
One of the reasons being, advance tax payments, the other reason being the fact that companies want to buy whatever plant and machinery they want to before March 31, put it to use, so they start getting depreciation for tax purposes. So, liquidity historically if you see the last 15-20 years, you will find that barring 2008-2009 which was a very exceptional year, in every other year liquidity tends to become very tight in February and March. So, I would expect more or less similar thing to happen in the current year. So, I believe that a 50 bps cut now will ease the pressure a fair bit. Q: You're betting on a 25 basis point rate cut tomorrow completely ruling out the possibility of any sort of frontloading all the way up to 50 which people like Mistry say perhaps we could see tomorrow, perhaps even by March. Do you believe there is going to be any frontloading at all, are you expecting a repo rate cut and a CRR cut tomorrow or just a repo rate cut? Rao: I think that the governor would restrict his action more to rate cut than a CRR. Over the last few months the governor has been highlighting the need to support liquidity more through open market operations and we believe that he will maintain and continue this approach.
A blunt instrument like a CRR cut given his pronouncement and concerns on elevated inflation levels, CRR cut is also ruled out for tomorrow’s action. So, liquidity support will come but more so through open market operations, that is the sense we get after reading the document.