RBI likely to cut repo rate, CRR rate on May 3: Expert

The market is betting that the Reserve Bank of India will cut the benchmark repo rate (the rate at which it lends to banks) by 25 basis at least, at its policy review meet on Friday. The view has been strengthened by the softening wholesale price index-based inflation. But on the whole, the picture is quite mixed.

According to Shobhit Mehrotra of HDFC Mutual Fund, a 25 basis-point cut appears to be a given, but the market would be looking at the guidance to get some sense on how many rate cuts to expect throughout the fiscal. Leif Eskesen of HSBC, sentiment is somewhat subdued now after the initial euphoria over the government’s reform push  Debabrata Sarkar, CMD, Union Bank says a minimum of 25 bps repo rate cut is given but in case we have a 50 bps cut, it will be good. Below is the verbatim transcript of the experts’ interview on CNBC-TV18 Q: The Purchasing Managers’ Index (PMI) number which you will be studying has come in at a two year low. The November 2011 lows have been touched. Very close to contraction territory, we are at 51 as far as the PMI is concerned and yet the market is running away to some near-term highs, how worried are you about the growth picture and why is the market ignoring it? Eskesen: I think the growth picture is certainly softening at the moment. There are a couple of reasons for that. Following the initial lift in sentiments on the back of the reform push we saw, the optimism is now to some extent receding, we have not necessarily seen much in terms of further reform push. More recently there has been a break in parliamentary session but an early start of the parliamentary session does not necessarily give a lot of hope that it will be easy to continue with the reform push. That to some extent is having an impact on sentiment. Maybe, also initially there were some expectations that you would get more traction on the ground earlier on during the reform push. That was a little bit too hopeful but nevertheless that was probably built into expectations and sentiments to some degree. However, as that has not materialized, you had some impact in a sense on economic activity as sentiment began to ease effectively. In addition to that the government has tightened fiscal spending and that has also slowed down growth. In addition to that global economic conditions have soured over the last couple of months and that has also added to the weakness that we are seeing not just in India but also outside of India. So that is the key reason why things are slowing down. Looking ahead, we are still looking at relatively low growth; we have to be deeper into the current financial year we are in before we start to see the effect of the reforms that have been taken so far, before we start to see notable traction in investment projects. Also read: Hoping for 1% CRR cut; repo not relevant for now says SBI Chmn Q: There are two unexpected bonanzas that have hit the markets – lower crude prices and lower gold prices. While for gold perhaps we are not been able to gauge the impact on the current account deficit (CAD), crude would be an all round benefit to inflation, to the fiscal deficit as well to the CAD. Do you expect macros to improve significantly and will that have any impact at all on growth? Eskesen: You are right crude prices coming off, of course is positive on the net basis in terms of lowing inflationary pressures. It helps to some degree add more disposable income that can support growth. The thing what we also have to keep in mind is what really is necessary in India to get traction on growth and get it back where it belongs is addressing the structural constrains on growth. That is where you are going to get major lift from and that is what is going to deliver sustainable growth pickup. That is where progress by necessity will be very gradual. It takes time for these reforms to kick in. It is a political difficult environment to work in right now, which means the government has to fight tooth and nail to get various reform measures through, that also delays the process. So one thing is you can take out these partial things like fall in crude prices but that is not going to be the game changer for the economy. The game changer for the economy in India has to be structural reforms, implementation of key investment projects. That is where a lift to growth has to come from. Q: The market is factoring in 25 bps rate cut as given but there is some talk that it could be 50 bps as well. What is your own expectation and secondly is it relevant at all because this morning we had State Bank of India (SBI) tell us that there will not be any transmission and as such this becomes a bit irrelevant, what is your own call? Sarkar: A minimum of 25 bps rate cut should be there and in case we have a 50 bps rate cut, it will be good. I do expect that the cut should be both in the policy rate by 25 bps minimum, as well as some cut in cash reserve ratio (CRR). A CRR cut could ease liquidity. The cost of deposit no doubt is a factor but it will certainly be reduced provided the liquidity gets eased in the market. Q: How much will you pass on? Will you be able to cut rates tomorrow, if there is a 25 bps repo cut? Sarkar: Basically, cut in the lending rates certainly depends on my cost of deposits and little bit is getting eased. We reduced wholesale deposit, cost of deposits last year, so impact started coming. I feel that in the coming days also, it will be little bit easier and we will be able to pass on something. For each and every bank structure of the cost is different. At this moment, we feel it is on reduction trend and we will be able to pass it on, if the policy rates favours us in this cut. Q: So, if there is a repo cut but no CRR cut, you still think you will be able to pass on some thing? Sarkar: I expect both a repo rate cut and a CRR cut. If some of the cost of deposit is reduced, certainly we will be able to pass it on. Q: We have already seen a decent amount of fall in yields, 7.69 percent as well was traded today on the ten year, what are you looking at in terms of a yield range on a ten year? As well what are you looking at in terms of yields on certificate of deposits (CDs), which immediately impacts the cost of money for banks, in case there is a 25 bps repo cut? Mehrotra: In my view, the yields on the longer end, the ten year bond could drift lower if the guidance in the policy indicates more rate cuts are to come. 25 bps is a given. In the guidance section, the market would be keenly looking to get some sense on how many rate cuts to expect throughout the fiscal and if the guidance turns dovish, which is what I expect then a significant move downward on the ten year bond is a distinct possibility. As we get into December and March, we could end at least 50-75 bps lower than from where we are today. _PAGEBREAK_ Q: What is your sense in terms of what kind of guidance the RBI could give? We had an expert telling us that if RBI comes out with rate cut, they may not sound too dovish and if they don't come out with rate cut they will sound very dovish. So what do you think one should expect in terms of guidance and how is that important for market going forward? Eskesen: If you look at the backdrop that we are going into this policy meeting there has been softer global economic conditions, domestically there has also been a weakening economic activities. With discussed the latest PMI numbers. Inflation is beginning to move in the right direction albeit CPI is still very high and is only coming off gradually. On balance, maybe the statement will be little bit more dovish. I still think when it comes to the forward guidance, they would highlight that the room for further cuts is quite limited. There will be some repeat on that front still. We too see a lot of the problems being more structural in nature not necessarily being on the table of the central bank to address. They still want to ensure that more of the heavy lifting still comes from the government in terms of structural reforms. The CAD of course has moved in the right direction and that is very encouraging but let us not forget that it is still quite elevated, there still has to be some catering to that as well. So I don't think they can do a 180 degree in terms of the forward guidance. May be on balance there is little bit more room for cuts but I think overall they still highlight that the room is somewhat limited. Read more: Here's how bank credit expanded in 2012-13 Q: What are you expecting though they will do tomorrow as well in terms of cuts for the rest of 2013? Eskesen: A 25 bps in terms of rate cut tomorrow. I think we are getting closer to the end of the easing cycle, I would not preclude the possibility of another small salvo over the summer but then I think that will probably be it. Q: In that case, what do you expect is going to be the range if it is going to be one cut, mildly dovish language but not overly dovish indicating that the scope is not very high for further rate cuts? What kind of a range are you expecting the ten year to move? As well do you expect CD rates, yields to also fall? Mehrotra: For CD rates to fall, one needs to see further improvement in liquidity conditions. What RBI could do is either cut CRR or announce open market operations (OMOs) or intervene in the forex market. Now  with flows likely to be significantly better with the recent developments, there is a distinct possibility that RBI intervenes and infuses liquidity. That would be very positive for the shorter-end yields, which will be very positive for the CD rates and will allow the yield curve, which is very flat right now to become steep and steepen in a manner in which shorter-end coming down far more than the longer-end. Q: How much fall are you looking at in CD yields? Mehrotra: It would depend how the rate cuts pan out as well as on when the liquidity conditions improve. However going over the next few months one could definitely see them trending lower. Q: Although wholesale deposits or CDs do not form a large part of your resources, it does look like that money could get a little cheaper. If you looked at the manner in which inflation has fallen and the way in which we are getting positive developments in the global markets as well in the commodity space, are you getting a sense that this year you will have an elbow room to drop deposit rates significantly? What is the average one year deposit standing at and by the end of the year where might it end? Sarkar: I hope the rate on interest will fall because commodity market has certainly fallen. Gold and other commodities have also fallen and inflation is also getting little bit easier. So enough scope is there that the cost of deposit will fall down. Presently it is hovering around 8.75-9 percent but still I feel that cost of deposit is little bit higher and I hope it will reduce in few months to come. Q: Would be to 8 percent? Sarkar: If not 8 percent it should be between 8.25-8.50 percent that I do expect. Q: So, the cost of money for the industry could be cheaper by about half a percent through 2013? Sarkar: Yes, if the liquidity is also coming along with it then certainly it would be easier and the cost of deposit will reduce. Q: What are you picking from your fraternity? Is the main thought from bankers that you will pass on the rate cuts or you will not? Sarkar: Broadly, whenever we feel it is getting eased, we will be able to pass on that I had already indicated. We are hopeful that we will be able to pass on something. Q: With today’s PMI number, what is your gross domestic product (GDP) rate for the current year standing at? Eskesen: We are still retaining our forecast for the previous fiscal year coming in at around at 5 percent so that means that the final quarter of last fiscal is going to be sub-5 percent. The current fiscal year, we are looking at a gradual recovery in growth to 6 percent, so we have retained our forecast on that side. We had for the most part built in the recovery into the second half of the fiscal year. As I said earlier on because these reforms did take time, they cannot be rolled out very quickly, so the recovery by necessity has to be quite protracted.