RBI should support growth, cut rate: Experts

The Reserve Bank of India (RBI) will announce annual monetary policy for 2012-13 tomorrow.

In an interview to CNBC-TV18, Shubhada Rao, chief economist of Yes Bank and Gaurav Kapur, senior economist of RBS speak about their expectations from the central bank. Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video. Q: We have got a dipstick survey, chances of a CRR pretty nil or negligible at this point in time. Repo, the market is still hoping and betting even post the commentary from the macroeconomic report. What do you make of it? Rao: Quite right. As far as CRR is concerned, we ourselves have seen systemic liquidity come well below Rs 1 lakh crore, which used to be the norm a few weeks ago. So, there is a certain degree of comfort. April and May, particularly with some huge chunk of government redemption of bonds as well as the government’s spending and liquidity therein has comforted the markets to some extent, as far as the systemic liquidity is concerned. So, immediate urgency for CRR cut is not seen. That was articulated in line with our expectations by the Reserve Bank of India. I would really be surprised if CRR is touched tomorrow. As far as the repo rate is concerned, the document seems to suggest that if you were looking for aggressive rate cut, looking at some future trajectory of growth, please do not expect any aggressive rate cut. I think quite inline with what the poll is. We believe that tomorrow it would come in. 25 basis points of rate cut tomorrow and followed by at best another 25 basis points probably sometime in June. I would think frontloading would be a better option. Seventy five bps would be completely contingent on what government does credibility on fiscal adjustments. Q: Do you believe that there will be at least a 25-basis point cut in repo rates and CRR? Or have you given up hope for CRR? Kapur: I think a repo rate cut is quite likely tomorrow. We are not expecting a CRR cut to start with. But the RBI has already cut the CRR fairly aggressively to counter the forex market. During February and March, the RBI did not intervene aggressively and the last volumes are now much more reasonable.
I think the liquidity deficit in the banking system is now about 1% of the NDTL which is what the RBI is uncomfortable with.
On the repo side, the timing is right now to balance the objective of supporting growth and manage. But I still feel that the magnitude could be about 50-75 basis point during the first half of the year.
There is room for the RBI to kind of tweak it that much to support growth because that’s something which is most likely to revive investment activity.
In its macroeconomic report,  the RBI has mentioned very specifically that investment intentions have been sluggish though the economy bottomed out.
The critical element is that consumption has held off and the RBI has hinted that in the first half of the fiscal year, it is not expecting any significant surge in investments at least based on data.
So, a rate cut might help revive investment activity down the line. Q: What is your key takeaway as far as the macro economic report is concerned and its effect on the policy tomorrow? Rao: The RBI  has clearly articulated all the problems as they get more and more intertwined - be it on the external sector in terms of the widening current account gap, the pressure on how to fund it in terms of the capital flow adequacy.
For capital flow adequacy you need corporate earnings, which are getting impacted because of input costs and interest burden. The RBI  has also articulated adequately on systemic pressures  in banking. The future scenario doesn't look too bright in terms of maintaining asset quality.
As Kapur pointed out, investment revival is vital to the extent possible in conjunction with government policies.
So, the monetary policy to that extent can add to that revival of investor sentiment. It cannot completely and entirely bear the burden alone of reviving the investment cycle.
So there are lot of problems highlighted in by the document. And rightly put, it’s not going to be as easy to resolve all these issues in one go.
It’s going to take a long while and inflation appears sticky at 6.5%-7%.