Hawkish RBI may keep rates unchanged: Morgan Stanley

Unlike most experts, Chetan Ahya, managing director, Morgan Stanley feels that the Reserve Bank of India (RBI) will keep rates unchanged in its May policy. Given the weak deposit growth, the two rate cuts done in the past have not yet been passed through, so there is no logic of a third rate cut unless the earlier ones are passed on, he told CNBC-TV18.

According to a recent CNBC-TV18 poll, all respondents expect a repo cut and 40 percent expect a CRR cut. Most don't expect the tone to be as hawkish as the macro economic report suggested. However, Ahya expects the RBI’s approach to remain hawkish. He sees no case for a CRR cut and feels that the central bank may opt for more open market operations (OMOs) rather than CRR cut. “To get governments cash balances into the banking system; they could move cash balances with a commercial bank like State Bank of India (SBI) that can provide liquidity and reduce the stress in the system. If not this, then go for OMO which is more permanent injection of liquidity than CRR cut,” he explained. Below is the verbatim transcript of his interview to CNBC-TV18 Q: What is your expectation from the policy this time around and would you change your expectations after what you heard from the Reserve Bank of India (RBI) at the Macro Economic Survey yesterday? A: We are expecting RBI to leave policy rates unchanged. Yesterday’s statement has been hawkish. So, it goes in that direction that they probably want to leave rates unchanged. However, I wouldn’t hold my breath on to that comment because of the macro economic review. We have seen that divergence in macro economic review and policy action in the past. The reason why we are saying that they will leave rates unchanged is because they have done two rate cuts. It is not passed through and the reason for that is that the deposit growth is still pretty weak. It is still at about 13 percent. So, unless and until we see the deposit growth in the banking system coming back, the rate cuts will not pass through. So, having done two rate cuts which have not passed through, I really don't understand the logic of doing third one. Q: Is it a possibility that the RBI might choose to just work with the cash reserve ratio (CRR) which has better transmission and leave the repo unchanged as you are suggesting or the case for a CRR cut is not strong this time? A: As such even CRR should not be touched. If they can walk out a way to get the governments cash balances into the banking system, one of the ideas would be to move those cash balances with a commercial bank like State Bank of India (SBI). If that happens that can provide liquidity and reduce the stress that we have in the system. Otherwise at this point of time seasonally we are not supposed to have Liquidity adjustment facility (LAF) going up to a trillion. So, if we do get that money back into the system and they can announce an arrangement of that today, then there is no need to do the cash reserve ratio reduction. However, if there is a stalemate and we cannot resolve that then there is an option for them to doing more open market operations (OMOs) rather than CRR because at the face of it, it looks like a temporary liquidity problem. Cash balances with the government and that should be ideally responded with OMOs rather than a CRR cut, which is a more permanent injection of liquidity. In whatever way that we may see, CRR cut is required for transmission. From monetary policy makers perspective it has always been a reflection of a policy tool. So, in some ways it will be synonymous to a policy rate cut. The message will still be that okay we are still doing some easing in this meeting as well. So, if they want to give a message that they want to do an easing right now, ideally it should be leaving repo rate as well as CRR untouched. Get those cash balances out or do OMOs. Q: There are some who still believe that because of the fall in Wholesale Price Index (WPI) and the way global commodity prices have moved of late, there is an outside chance that the RBI may even cut it 50 bps. You obviously disagree with that expectation? A: Yes. The question is not about what RBI does any more. The question is whether we are going to get it transmitted into lending rates. Therefore the question is whether we are going to get deposit growth back. We should spend all time forecasting that rather than what RBI does and may be to some extent everybody is flummoxes to why deposit growth is taking such a long time to get back into the banking system. However, the answer to that is that inflation expectations underlying are still very high. We have left it at 10 percent or above four years plus. It is not going to be easy to get it back below and by cutting rates preemptively without transmitting into the banking system is not going to help that.