RBI must continue its hawkish monetary stance: HSBC

The Reserve Bank of India must continue to highlight the risks associated with inflation as it is the central bank’s predominant concern at the moment, says Leif Eskesen, chief economist for India & ASEAN, HSBC Global Research. According to him, the apex bank may raise the interest rates further to deal with inflationary pressures.

Reacting to the RBI policy on CNBC-TV18, Eskesen says the governor needed to inject more liquidity into the system after strict measures taken by the central bank in July-August. Also, liquidity is required to make the repo rate operational rate once again, he adds.   Below is the verbatim transcript of Leif Eskesen's interview on CNBC-TV18 Q: You have said in your report that the RBI will have to continue its staring contest with inflation. How many more rate hikes could that potentially mean?
A: We will have to see but right now RBI must continue to communicate a hawkish monetary policy stance. It must continue to highlight the risks associated with inflation, the upside risks we still have on that front. It indicates that it is their predominant concern at the moment and also continues to signal that if needed, they might hike monetary policy rates further.
For now, they may remain on hold while they are still trying to read how the inflation readings will pan out in coming months and also how the dampening effect from slowdown in growth or the weaker growth backdrop would play out in terms of dampening inflation pressures.
We have not necessarily built any further rate hikes in the short term for now but they may have to potentially raise rates further to help anchor inflation expectations.
I am not sure that they have a bias at the moment in terms of necessarily being ready to do more rate hikes in the very short term. Q: The RBI governor got a very hard stance on rising prices. He said inflation will be his primary concern even then he has kept promise to maintain systemic liquidity in the system. He has got a hard stance on inflation yet he has made it very clear that he wants to maintain systemic liquidity, do you see a contradiction there?
A: Not really. What people have to keep in mind is that the steps that were taken over the summer to stabilise the currency were extraordinary initiative with short term measures aimed at reigning in the pressure on the currency at that time.
The increase in the core money market rate over that period of time of about 300 basis points left the monetary stance too tight effectively. So, now that the currency has stabilised you need to bring the core money market rate down from that level. It has to be higher than it was three-four months ago but not as high as it was left over the summer.
To bring it down, to be more inline with the repo rate now they need to infuse bit more liquidity into the system to again make the repo rate the operational monetary policy rate which was also the stated objective we had when we read through the last monetary policy statement from September.

Q: Do you think that concerns with regards to both the CAD and the rupee which was so heightened barely a month ago have now come down but are likely to escalate again as we get closer to the potential tapering by the US Fed? So, lets say in Q1 of next year, the reason I am asking you this question is I know that they are reversing several currency driven measures but will that continue to be a big challenge for the RBI going forward along with keeping its eye on inflation, making the job on inflation even tougher?
A: When it comes to the current account deficit there are still lingering risks and concerns on that front related to Fed tapering but if you look at the CAD, it has narrowed a fair bit since this summer and the trade deficit has come in quite notably both because you have had a weaker growth story on the back of this, I mean in terms of domestic demand and also in response to the weak exchange rate and to the steps taken to curb imports.
Then the financing measures that the government has introduced, RBI has introduced have been quite successful. So, when it comes to current account deficit itself, financing the current account deficit - the things on that front have certainly improved over the last couple of months.
In addition to that, when it comes to Fed tapering, may be some of the fears over the summer globally about what implications of Fed tapering would be, were may be a bit over done. So, maybe expectations about Fed tapering have normalised to some extent. Also, when Fed tapering actually begins it would be done quite gradually. The Fed is still quite concerned about the growth story. There is still a fragile recovery in the US. They would be careful about managing yields in that sense. So, that spells a sort of gradual stance of Fed tapering in anyway. Q: You don’t think that you can build in rate hikes as yet. You have mentioned growth being the government’s problem predominantly in India. Given what we have seen in the summer, the de-escalation of those worries, the RBIs position on inflation and the fact that we go into election next year, has your view on India changed at all as an investors market?
A: What we have seen though since the summer, I think some of the external risks that India was facing have receded somewhat both because the government has taken steps to address them and the RBI also in that context has chipped in. I think the steps that have been taken now in terms of tightening monetary policy are also important from that perspective. The external risks have eased based on the things done domestically.
Also, the risks associated with Fed tapering may be a bit over done over the summer, there is some normalisation in terms of expectations or what the implications would be and that has also reduced some risks associated with Fed tapering when it actually begins. So, things as far as India is concerned have improved since summer but that doesn’t mean that we can expect a very significant recovery in growth, just the external risks have sort of receded.
The recovery in growth in India will still be quite gradual. We are still looking at 4 percent growth this fiscal, 5.5 percent growth next fiscal year. So, we are somewhat less optimistic or bit more pessimistic about growth than the RBI and the governor at the moment. The recovery would take quite a while before it actually filters through.