RBI Credit Policy: Expect liquidity to improve in July-August, says Union Bank

On the topic of  transmission of previous rate cuts, she said that if the cost of banks go down, rates will go down too. However, it depends on demand-supply equation of deposit rates. She expect deposit rates to remain range-bound.

Below is the transcript of Arun Tiwari's and Shilpa Kumar's interview with Sonia Shenoy and Latha Venkatesh on CNBC-TV18.Latha: What have you made of the statements? For you there is also one specific statement. The RBI will shortly review the implementation of the marginal cost of funds-based lending rate (MCLR) framework by banks, otherwise by just this upward bias and they will continue to retain this liquidity and move it towards neutral. Tiwari: Exactly, this policy was on the expected lines because RBI governor has been very consistent in his approach. One globally, he has been professing that there should not be too much of disparity in the monetary stance of the different regulators. So if you start from Japan, it is negative rates. Say Euro area, they are holding on to that position. US, lesser said is better in the sense that buzz is also muted.Latha: Does this policy considering that liquidity may move into neutral as Jayesh says in July and August because of redemptions, is there a scope to see more MCLR cuts?Tiwari: Now it is marginal cost of funding. So, as the liquidity improves my cost of deposit will go down and the benefit will be passed on to the customers. So, from customer point of view he will have to pay lesser rate of interest whether rate cut by RBI or not.Latha: You expect that to happen in July-August?Tiwari: Yes.Latha: What did you make of the governor’s statements on liquidity as well the slightly hawkish note that inflation would be higher than expected, higher than they originally expected? What is your sense of what might happen in the bond markets here on?Kumar: Let me answer the inflation question first, I don’t see it quite as hawkish, in a sense market was already looking at inflation numbers. They were looking at the fact that indeed some parts of inflation had ticked up. Therefore in a sense the Reserve Bank of India pretty much articulated what was on the minds of most economists and market participants. So, to that extent I don’t really see it as hawkish. I take a lot of comfort from the fact that in his call the governor said that they are looking for a room to actually stay accommodative or more or less the same thing in different words. I take a lot of comfort from that fact. Moving on to the second question about liquidity, from the liquidity perspective I think the commentary on what is going to happen going forward a particularly related to foreign currency non resident (FCNR) that commentary was very welcomed. They have very categorically stated that in terms of dollars they will be there to ensure there is not much volatility. The fact that on liquidity itself they will continue with what they have been doing which is trying to stay pretty easy on the liquidity front. So, both these are positive comments, having said that from the bond yields perspective I think the market will pretty much stay range bound.Latha: What is your sense therefore of the September FCNR migration of deposits away from the country? Do you think it will be smooth or do you expect personally in spite of what the reserve Bank said some tremors in the availability of rupee liquidity because dollar liquidity perhaps will be provided by the Reserve Bank? Kumar: I do expect it to be pretty smooth. While the fact it is true that there is a lot of FCNR repayment which are going to fall due between September and December I think banks themselves are pretty much on top of the problem. The regulator has consistently communicated that while they will not want to what Governor Raghuram Rajan said encourage moral has out of any sort I think the Reserve Bank has also taken ample stock of situation and they will be there in case there is unwarranted volatility sometime arising may be even out of inefficiencies. So, not necessarily that the big picture there is something wrong but intra few days there could be inefficiencies and the Reserve Bank is therefore there.For full discussion, watch accompanying videos...