Ahead of the annual monetary policy today, Chetan Ahya, MD, Morgan Stanley believes there is enough liquidity available in the banking system and therefore, there does not seem to be any justification for a CRR (cash reserve ratio) cut by the Reserve Bank of India.
In an interview to CNBC-TV18, Ahya says there is a 60 percent chance of a 25 bps repo rate cut today. He believes SLR (statutory liquidity ratio) tweaking is possible but that is a regulatory compliance call and not related to monetary policy.
India Inc has pitched for rate cut to boost economic activities, but RBI is unlikely to oblige as unseasonal rain may adversely impact food inflation in the coming months.
Morgan Stanley is forecasting another 75-100 bps repo rate cut by the RBI this year.
Below is verbatim transcript of the interview:
Q: There is this CRR cut thing which normally comes from State Bank of India (SBI) and it comes from there again, any legitimacy for that request?
A: I guess it is arising from the fact that the banks have not cut lending rates so there is a question of transmission issue. But honestly, I don’t think it is about liquidity.
If they do want the transmission to get through, it is just to ensure that the banks have good amount of capital adequacy ratio because we think the banks are risk averse with their current non-performing loans (NPL) developments and they want to definitely build margins to ensure that they cover up for their credit cost.
I think it is a separate solution not CRR cut because there is enough liquidity in the banking system. If you just observe the call rate, it has been persistently below the repo rate for sometime now on a weighted average basis. So it is not about liquidity. So we don’t see a justification for CRR cut.
Q: How high is the probability of a repo cut today?
A: We are saying 60 percent chance of RBI cutting base today which is saying more than even chance. We do recognise that it is a touch and go decision considering that the last inflation data point was an uptick and it is at 5.4 percent. However, if you look at those last two months uptick in data points was largely driven by a base effect and the high frequency data point on food conveys us to ask that there is no serious issue on food price inflation out of the unseasonal rains.
To that extent, we feel that there is a good chance that RBI cuts rates today by 25 bps. Also non-technical issue is that if RBI is not cutting rates today, effectively it will then mean the next rate cut option is June and for three months they would not have cut rates.
They will have to make the call on what will happen to March and April inflation and try to take the decision today rather than waiting for March inflation to come out to be at around 5 percent and then do another intermitting rate cut.
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