As things stand now, with a soft July CPI number and falling yuan, all indicators point towards a pre-policy repo rate cut by the Reserve Bank of India, says P Pradeep Kumar, managing director and group executive (corporate banking group), State Bank of India.
There is a need for a rate cut and to let the Indian rupee depreciate to boost export competitiveness, he says.
On lack of transmission of lower policy rates through banks, Kumar says SBI has been lowering rates for some time now. Mohan Shenoi of Kotak Mahindra Bank is not as convinced about an inter-policy rate cut as Kumar. He says RBI is likely to wait and evaluate the event-based risk from yuan devaluation and the US Federal Reserve rate action.
Below is the transcript of P Pradeep Kumar and Mohan Shenoi's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.
Latha: Do you think that you could reasonably expect the rate cut even before September 29th?
Kumar: Everything points towards that, lower inflation plus there is an issue of the Yuan devaluation of the Chinese currency. The real exchange rate (RER) I am told is around more than 125 so we can expect more devaluation of the Chinese currency. If that happens there is a need to dramatically cut our rate otherwise the rupee will be stable.
We will have to let rupee depreciate otherwise many of our exporter and importers will be in deep problem. I think Reserve Bank of India (RBI) Governor has no choice and indication is that the Fed rate hike is unlikely to take place in September 17th. So, the Governor now has an opportunity to reduce the repo rate even before September 17th.
Latha: In fact why not even in advance of that if the actual inflation number and therefore inflation expectation is anyway falling should be expect a dramatic cut in deposit rates from you?
Kumar: If you have been seeing State Bank of India (SBI), it has been the first to cut rates of the block. We have been cutting and we have cut even in the month of May, June and July. We have even imposed a restriction on bulk card deposits of about Rs 50 crore although we have a card rate for bulk deposit we have said it is applicable only for Rs 50 crore and above. Only if we need it we will take it. So, our deposit costs have come down in the last quarter for four basis points. If the deposit cost starts coming down further I think there is a scope for a rate cut.
Latha: Like Pradeep Kumar you think the case is right for pre September 29th rate cut?
Shenoi: No, I did think about it and my own considered view is that the inter policy rate cut is unlikely. Because I feel RBI will wait for clarity on the event risk arising from Yuan devaluation. They will also look at the circumstances that will emerge, is, if there is Fed rate hike in September. Also remember RBI will be keen to see whether the fall in consumer price index (CPI) is sustaining or not. In other words persistence of benign CPI is what RBI will look for. Only if that is there and of course the progressing monsoon, I feel an inter policy rate cut looks very unlikely at this stage.
Latha: Pradeep Kumar was also arguing that the landed price of most metals or practically anything you import from China is now become so cheap, additional cheap because of the devaluation that there is a case to actually let the rupee go above the 65 per dollar mark and therefore that strengthens the case for a rate cut?
Shenoi: Depreciation of rupee yes is required to boost exports, to remain competitive in our exports but I think that depreciation will not be disorderly. You know India fundamentals are strong now so I don’t see any dramatic impact on rupee. Gradually, calibrated manner depreciation is possible over a period of time but I don't see anything kneejerk happening out there.
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