Reserve Bank of India's (RBI) measures to shrink the liquidity deficit in the system is a welcome move, says Hitendra Dave, Head Of Global Banking & Markets HSBC India. The policy initiatives are a big structural change, he says, as the regulator has shown a commitment to pare the deficit. "You can’t just keep injecting short-term money through the Liquidity Adjustment Facility and repos. This policy is a recognition that long-term solutions are being looked at," he said.
Responding to RBI's move to infuse more money through open market operations (OMOs), Dave says the regulator isn’t flooding the system with liquidity. No need to worry on that count, he says. This system, he feels, won't be a Rs 100,000 crore surplus.
Largely agreeing with Dave, Samiran Chakraborty, Chief Economist at Citi, says he won't lose his sleep either on the infusion of money RBI is planning through OMOs as it is not a large number.
When the government factors in the Pay Commission hikes, the inflation will likely inch up. "We are nearing the end of our interest rate cut cycle," he says. He bets on one more rate cut, if inflation does trend higher.
It was difficult to pin down BP Sharma, ED with Bank Of India on whether the bank will be reducing its deposit and lending rates. However, he agreed that RBI's decision to reduce liquidity deficit from 1 percent of Net Demand and Time Liabilities (NDTL) to zero is a positive step.Below is the transcript of the panel discussion with CNBC-TV18's Latha Venkatesh
Q: Do you think that the Reserve Bank of India (RBI) has walked the talk? Now things are done and you have no more complaints? Dave: Everybody in the financial market had two things which they were looking out from this policy. One was very clearly 25-50 or the minority thought no cut. But more importantly as you had also been highlighting in various commentaries that what exactly do they announce around liquidity and from a market perspective it could not be any better. If they simply announce that we will do certain amounts of open market operation (OMO) or we will do certain amount of purchase in the FX market that would have been a onetime measure and once again you don\\'t know because what the unknown in the Indian financial market is the leakage from the system of permanent liquidity through what we spoke about increase in the currency in circulation. So, now that there is a complete commitment that liquidity conditions will be brought near neutral it assumes that as and when they will see events unfolding in front of their eyes they were open to do more and more or less and less as the case may be. And this is a big change because since 2010 partly because of conditions engineered by or by factors outside RBI\\'s control and certain within RBI\\'s control we have just not had any sustained period where the system has been close to neutral or slightly surplus and the better part from the market is that there is finally a recognition that you cannot keep using short term liquidity injections through Liquidity adjustment facility (LAF) operations and repos and use those to say this is a good replacement for permanent outflows. So, combination of these two things would suggest that this is a big structural change. Q: I have two extreme fears and I want your comment on that. One fear is the number which the governor said at the conference call about Rs 15,000-20,000 crore of infusion every month. What is that, Rs 240,000 crore and then he says he will make up for past liquidity deficit, Rs 90,000 crore. Rs 310,000 crore, are we likely to get into a situation where we were in the Subbarao time where we may overdo our liquidity and mess up? Dave: No, that has been your fear and you expressed it two-three times, I read your article also on this. So, in the starting point we are a long distance away from there. So, this is a legitimate concern to express but I am not sure that is an immediate and present danger of any nature whatsoever. What we need to understand that RBI is not flooding the system with liquidity. RBI has only committed that A, part one, the current permanent deficit which is between Rs 50,000-75,000 crore they will fix and B, as they see liquidity leave the system they will continue to address that through either FX intervention of through local currency intervention on an ongoing basis rather than wait for it to grow to a point where they have to suddenly do a lot more. So, this is not a system which is going to go Rs 100,000-200,000 crore surplus. This is a system which is going to grow from a core deficit of Rs 70,000-80,000 crore which is increasing at the rate of Rs 15,000-20,000 crore a month which is what I guess the governor was talking about. So, if you take these two into account what you are really saying is we will not have the levels of deficit that we have experienced and if there is a deficit that its purely frictional and not the kinds that we have got used to.
Q: Samiran Chakraborty said RBI will get there in one or two years, doesn\\'t that leave your system, your world, the money market world a little worried? In fact that was the point of time at which the bond markets actually fell when Rajan said he will take one or two years in response to my question, doesn\\'t that worry you?Dave: There are two things. One is, there appears to be a commitment at least that is the way I heard it or I read it that the existing gap will be addressed relatively quickly which is we can take an estimate but RBI will have the exact number but my guess is anywhere between Rs 50000-75000 crore of which Rs 15000 crore odd has got announced today itself. That is part one.Part two is, which is the largest source of permanent outflows? You will notice that all the money that is going out have gone out in Q1 and are going out in this current quarter. Eventually a significant part of it comes back in the July -September quarter. So, you do have to take into account the fact that they will also get time to do so. I don\\'t think it would have been very sensible or prudent on the part of the central bank to say we will do everything possible and in these next 6-12 months, that I think could actually have repercussions outside of what the intention is which is just to make the liquidity conditions normalised.Q: Ultimately this has to trickle down in terms of lower cost of money for the investor. What do you think, are you seeing deposit rates fall first and then are you seeing lending rates fall by when?Sharma: If you are linking lending rate with this new concept of pricing, there are two thing. So, far as the monetary policy which RBI has announced today there were three interesting pieces on that.One, the liquidity deficit which RBI kept at 1 percent of Net Demand & Time Liabilities (NDTL), now RBI has decided to make it zero. That is a very welcome step. Second important aspect is RBI was having a margin between MSF and reverse repo and reverse repo and repo. From 100 basis they have reduced it to 50 basis. So, in a small way it will help the bottomline of the banks. Deposit rates coming down and pricing on asset side coming down both are two sides of the same coin. Obviously one cannot go down in isolation of the other.However in short term one thing I want to flag here, although the steps taken by RBI are very welcome, come September the RBI will take away nothing less than Rs 2 lakh 25 thousand crore from banks because FCNR(B) is getting matured. USD 34 billion will flow out of the country.Third, inflation which is estimated at 5 percent appears to be realistic provided there is normal rainfall. I don\\'t know whether the arrears that is payable on account of 7th pay commission and one rank one pay has been factored. Nevertheless the steps are welcome.Q: You are already on marginal cost, secondly you have got as you said even if you made a mistake on CRR the penalty is only going to be 50 basis more MSF rate. Given all this and this 25 basis points cut and a slack season that we are entering do you expect that for your borrower money gets cheaper? By when and by how much?Sharma: As I have already pointed out we do have a liquidity concern that is going to take place in September.Q: That is September, April-May-June, are you going to give any cuts? You are or the banking system?Sharma: Cut on the deposit and cut in the pricing on asset side both have to take place. I can cut interest rate on deposits only when liquidity portion is comfortable. Whatever steps RBI has taken our ALCO is going to meet and we will take a decision.Q: What is your sense for the system itself, generally as a seasoned banker what is your expectation? Should we get 25-35 basis cheaper credit for borrowers?Sharma: I won't put a number but the steps that RBI has taken are obviously leading to a situation where transmission of cost has to take place sooner or later.Q: Do you think it would have been wiser for the RBI or maybe they can still do it to take away the governments surplus, handle it separately and only provide liquidity for the core or the durable liquidity. They did not make it clear but should that be the way forward?Dave: The way I have heard and the way I have read the paper, it would suggest that I think they are very focused on addressing the core shortfall or the permanent outflows which a lot of people in the market have been saying that so far they have taken a slightly convenient route of just treating all liquidity as liquidity. So, whether the outflow is permanent but you give 15 day repos on a persistent basis and system should not differentiate. So, at least my reading of it is what they have said is we will begin to differentiate between permanent or what they have called durable. Short term and the permanent or the durable part is what will get fixed. Initially the existing deficit and subsequently on an ongoing basis the monthly number of Rs 15000-20000 crore for as long as it takes to bring it down to neutral. On the issue of government balances what really will change is currently when the government has high balances with the RBI, the banking system loses its deposits and the RBI compensates by offering it collateralise. So, what you lose on uncollateralised deposits and accounts you get back by way of collateralised borrowing.So, if the government balances what we made available directly to the banking system you will really replace one form of uncollateralised deposits with another form of uncollateralised but at a slightly higher price may be. That will be finer difference but per se will it make a difference to either transmission or interest rates or market yields etc that element my guess is not so relevant. I think the totality of what has been done today along with rate, commitment to accommodative policy, narrowing of the corridor, the tactical tool around 95 percent CRR going down to 90 percent, I think cumulatively as the system gets used to this and as the liquidity deficit continues to shrink further and further, I think this could be quite a fundamental change simply because it is happening after almost six years or so. So, we need to see how the markets react when we realise that we don't have to the RBI every day for Rs 50000 crore to Rs 250000 crore.
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