RBI rate cut to be 25 bps; accommodative stance likely: JPMorgan

With only a few days to go for RBI's credit policy meet, the cut in small savings rate and a higher-than-expected fall in food prices have led to hopes of a 50 basis point cut by the RBI. Bankers have just cut their marginal cost of funds lending rate (MCLR) but they are more interested in knowing whether there will be some help on the NPA (non-performing assets) front.Banks and bond dealers want more liquidity in the banking system. They expect the RBI to ease liquidity. Currently, banks are borrowing between Rs 1.5-2 lakh crore everyday from the regulator. Dealers and bankers want a 50 basis point (bps) cut plus an accommodative stance. However, with inflation keeping steady at 5-5.5 percent, chances of a 50 bps cut may not be as sensible as a dovish 25 bps cut. To know more on what to expect from the RBI when it meets on April 5, read the experts' take. Below is the transcript of Jahangir Aziz, Jayesh Mehta and Srinivas Varadarajan's interview with CNBC-TV18's Latha Venkatesh. Q: What is the sense you are getting? Space for 50 bps? Aziz: Yes, that is about what you can make out. There is probably space for 50 percent but the question is if you do a 50 percent and then give signs that that is the end and we saw that last year then the market will not be very happy. So, you can't have a hawkish cut. So, if the Reserve Bank of India (RBI) is going to do 50 percent they have to (4:27 danger) further rate cuts, possibility of further rate cuts in the future. So, that is one possibility. The alternative is to play it very safe and do a 25 with a more convincing promise of 25 bps rate cut later on and that will avoid the expectation that this might be a hawkish cut. You really need a dovish cut at this point in time. Whether it is 25-50 bps that is something that the RBI has to decide but really you need a dovish cut to keep the market happy. Q: Give me a one word answer. A dovish cut of 25 or a hawkish cut of 50, what is your choice? What is your expectation? Aziz: It is going to be a dovish 25 cut with a promise of another 25. Q: What are you expecting? Varadarajan: I broadly agree with what Jehangir is saying but again you started off by saying rates and liquidity and it is very difficult to be hawkish at this point of time when everywhere around the world things are looking like going further downhill and you got negative rates and the US also is talking about slower rate hikes. So, overall the environment is something where it is difficult to be hawkish from a rate perspective. If you had looked at what you said in terms of the fiscal deficit and other actions which the government has put in place clearly some of the market expected that rate cuts would have happened say immediately post Budget. That ammunition has been withheld clearly with an intention that the Marginal Cost of funds based Lending Rate (MCLR) kicking in on April 1 transmission to some extent is possibly like it will be more and therefore why waste the rate cut before the MCLR kicks in and therefore let MCLR come through and therefore then cut rates. So, I would think that cut 50 and make sure that you send a strong message on liquidity that there would be adequate liquidity and there would be adequate measures being taken to make sure that liquidity is available and that to some extent will negate in terms of trying to take a call on whether this is the last of the rate cuts. Meaning avoid liquidity, cut 50, therefore from a transmission perspective try and make sure you get the best outcome in terms of whatever ammunition you have and we have always been surprised on inflation being possibly softer than what we had anticipated till now an nothing in this world has changed first to change that. Of course core inflation continues to be sticky but I would still believe the inflation can still continue to be fairly well moderated and to that extent space which we never thought we will be at six quarter but now we are talking about six quarter._PAGEBREAK_Q: Basically what you are saying is, you would have said it would be a hawkish cut of 50 basis points. My assumption is that if it is a 50 basis cut, it will have to be hawkish because the remaining chances are not there but the Governor can moderate it with liquidity is your point. Varadarajan: The point I am trying to make – cut 50 basis points, maintain the accommodative stance and assure liquidity. So, that way I don’t think so the tone becomes hawkish. Q: What are you expecting, 50 basis points or 25 basis points and the tone? Mehta: My expectation which is 50 basis points to make accommodative stance and as the world today, there is no case to be hawkish about it; the way the world is moving, as of right now the world looks much softer. Of course things can change later; that is a different story but on April 5th there is no case for being hawkish even if you do 50 basis points. Yes, one can say further room may not be there, that would be hawkish but accommodative stance itself would be good enough. So, 50 basis points and accommodative stance is I would say the hopeful thinking. Q: The core inflation as you pointed out is at 4.9 percent -- Srinivas Varadarajan said 4.9 percent, almost 5 percent. The Governor has always wanted a 1.5 percentage point difference between inflation and his signaling rate. So, at 6.25 percent, I am sure the one year forward rate will be little higher, so, the difference is not there. Is there a scope therefore, if everybody agrees that inflation is going to be 5 percent then after 6.25 percent where is the scope? Wouldn’t that be the last of the cut so per se however he put it wouldn’t that be hawkish? Aziz: That is where what Srinivas Varadarajan and Jayesh Mehta were saying comes into play that can you therefore say things on the liquidity front which would give you much greater belief that even if there may not be further rate cuts if you do a 50 basis point but at least the liquidity situation will be more easier. However, my sense is that it is very difficult to foresee where unless the Reserve Bank of India (RBI) is going to do significantly more Open Market Operations (OMOs than what is required to keep base money, whatever it is that is required given inflation rate of 5 percent and growth of 7-7.5 percent, to provide more than that liquidity looks unreasonable at this point in time. So, I take both Srinivas Varadarajan and Jayesh Mehta’s point that 50 basis points with a promise of more accommodative liquidity is the best thing but it might be a bit difficult to deliver that. On the other hand, this RBI under this administration has proven time and again that when they want to move, they want to move in big steps. So, you could see 50 basis points with an accommodative stance but it is hard to see balance of payments flows, what the amount of base money creation is required to keep this economy going to deliver reasonably large amounts of liquidity support. Q: My fundamental problem really is that the difference between the inflation rate and the signaling repo rate, the Governor wants to be 1.5 percentage points and once you are at 6.25 percent, I don’t see how you can give a 50 basis points as well as sound accommodative? Varadarajan: Just one correction, I think last time in the policy, the 1.50 or 1.25 percent was not pegged to the policy rate, it was pegged to the one year Treasury Bills (T-Bill). So, that gives you more space. Q: The big accommodative gesture provided by the Governor last policy was that he will setup a committee which will look at the framework of liquidity. What are you expecting? Do you think he has to say that 1 percent deficit of the total deposits need not be maintained, that he can be surplus liquidity, what do you want to hear from that liquidity framework committee? Mehta: There are two things there. I think first and foremost, when we are saying liquidity accommodative stand and liquidity being provided, I think one visible difference which we didn’t get last year, I think the repo liquidity which is collateralised borrowing, when we need to infuse liquidity, it is also reflecting on bank deposit growth. When you need to infuse liquidity, it has to be uncollateralised infusion of liquidity. So, maybe it is not necessary when we say infusion of liquidity, not necessarily OMO purchases, not necessarily the other things, maybe the surplus government balances can be – actually we have been talking about it, it can be with a nationalised bank, so, why not do that? That will take care of liquidity. All we require is basically permanent liquidity in the system or even uncollateralised liquidity. The problem today is, it is all collateralised liquidity which is being provided. If I can ask a question, maybe to Jahangir Aziz also, if you look at the macroeconomic parameters, we have the best macroeconomic parameters as of right now, your fiscal deficit is in control, your small saving rates has been cut, your current account deficit is in control, oil prices, global commodity prices kind of oil price is helping us and the global rates are also helping us. So, in that situation, if you don’t go positive on liquidity, when do you go positive on liquidity i.e. surplus liquidity in the system? Q: Time for surplus liquidity? Aziz: I think that train has left the station five years back. That has been the framework in which they have been operating for the last five years. Q: The Governor said he will appoint another committee to look at that framework. Aziz: That could well be true but then the fundamental argument that I do not get any transmission unless I keep the system in deficit liquidity 0.5 percentage points or thereabouts, I think that still remains the case. So, my guess is that to ask for surplus liquidity, that is breaking away from something over the last five years and that will require a significant change. Now this new framework could say we can go back to surplus liquidity but I doubt that we will be going back in the near-term to a situation where we put the system into surplus liquidity. We can ask for reduced deficit liquidity, I think that is really where the question is that if they had promised 0.5 percentage of deficit liquidity at least meet that target rather than starve the system with more deficit liquidity. I think that argument is a valid argument._PAGEBREAK_Q: To carry forward liquidity argument, as Jahangir is pointing out the RBI has made it bedrock that transmission can happen only if the banking system is going to RBI to meet its CRR commitments, going and borrowing whether it has to borrow Rs 90,000 crore or Rs 45,000 crore could be a matter of debate. Do you think that there is a chance for surplus liquidity? Varadarajan: I would agree with Jahangir there that for whatever reason based on whatever recommendations of the previous committee are. The RBI has decided that keeping the system in deficit is the best way to ensure transmission. The key thing which possibly the new committee can deliberate is that there is an assurance that the overnight rate is going to be very close to the policy rate, but that they have delivered, but what I am saying is it is a question of how easy it is with a lot of new dispensations coming through, how do we make sure that the market gets a lot of comfort in terms of making sure that irrespective of the scale of my demand I am going to easily achieve that because if some of the larger banks have a feeling I need so much money today and scamper around early in the morning, you will see some of these rates higher. So just a comfort that this is something which is assured and I would have no issue in terms of borrowing at that level if we can argue that RBI has been able to deliver that but at the back of people\\'s mind you need to be comfortable that this is okay, this is not an issue. I think that comfort is still not fully there within the system. So Jayesh can argue about uncollateralised borrowings etc. Q: What do you want to hear? You want him to say as Srinivas is just saying that banks need not worry about that minimum liquidity, RBI will definitely provide. Mehta: If you come down from surplus negative liquidity from Rs 90,000 to Rs 40,000 or Rs 30,000, so at least that Rs 50,000 would come uncollateralised and then the collateralised liquidity requirement or shortfall would be just Rs 20,000-40,000 crore, so that is still an acceptable situation - that\\'s one. Second, when we say overnight rate, we also have to look at spot and forward; it is like cash-tom. So if you look at last few days, the cash-tom fixing use to happen at almost double digit, so that is not getting controlled there. However, when we say we want to maintain 6.75, you can pump into repo and it cannot go beyond 6.75 but then what happens to other markets. So that is also important. Last, why keep such a wide gap of 1 percent between repo and reverse repo. Bring it down to 5 bps-25 bps and I have a slightly different view because there are two reports of RBI; transmission is better in tight liquidity for raising rates transmission but cutting rates transmission is other way round. So from that perspective I would still argue at some point of time to get into surplus liquidity. Q: Do you expect - with a 50 bps cut - how much do you think can get passed on, how much will money get cheaper to a micro, small and medium enterprise (MSME) or Rs 100 crore loanee. Can it get 50 bps cheaper? Varadarajan: It depends on how much deposit rates move. If you look at deposit rates right now. I think even though wholesale deposits in terms of certificate of deposits (CDs) or otherwise are possibly around 7.70-7.80. You have seen one year deposit rates of most of the larger banks at around 7.5 right now. So there is already to some extent pricing in of easier liquidity coming in April. So we will have to see how far this can go lower. If 50 bps cut in policy rate happen, if CDs and go down, which basically to some extent peg.... Q: Post Office, one year is 7.1. Why can't you all do one year deposit of 7 or at least State Bank of India, comparable sovereign? Varadarajan: Post Office has own tax advantages also, so you are not just investing on yield basis. You would expect one year CD to move down to 7.30-7.40 from hereon on 50 bps rate cut and you have scope for one year deposit rates to go down to 7.25. Q: So then lending rates can go down quarter, you think? Varadarajan: I think so. Q: Will that spur credit offtake? Varadarajan: It should help. Q: This plus marginal cost of lending rate (MCLR), so probably a new borrower gets 35 bps cheaper money. Varadarajan: Yes that is true but because of that if people are going to borrow more, I am not too sure, but next year's credit offtake is positively going to be better than this year. Q: The whole argument of keeping the real rate at least 150 bps was to encourage deposits and RBI has done that for nearly two years but deposit rates is at its lowest - 9.9 percent? Varadarajan: I think Jahangir is a better person to answer this question but velocity of money is much-much lower and to that extent deposit growth is sluggish. Aziz: The problem with all of this as I understand that RBI wants to keep deposit rates positive so that households do get this positive return and that induces savings, but if you look at any cyclical downturns, it doesn't matter whether it is India or any other part of the world, every cyclical downturn, you require rates to go negative; deposit rates to go negative and that is the way in which you transfer resources unfortunately from the household sectors to the corporate sectors and corporate sector's profit starts rising and you get out of recession but keeping real rates at positive, you are not allowing that transfer resources to take place which is why corporate profits aren't picking up. Varadarajan: Just to clarify, Jahangir you can correct me. What Jahangir is saying, if you have 1.2 percent that corridor can go down to 1 percent or go to 2 percent and it depends on what stage of economic cycle you are.