Last Updated : Apr 06, 2015 05:44 PM IST | Source: CNBC-TV18

RBI stance won't be dovish; expect liquidity measures: RBS

Gaurav Kapur of RBS believes the repo rate will be left unchanged after the 50 basis points cut over the past two-and-a-half months. Focus will be on RBI‘s assessment on inflation and growth, he says. He expects some steps on monetary transmission.

With the first credit policy of the new financial year to be announced Tuesday, the market and the economy will not only be watching for the rate action but also for RBI's assessment of the new year, its growth and inflation forecasts as also the governor's views on the prevailing external environment.

Gaurav Kapur of RBS believes the repo rate will be left unchanged after the 50 basis points cut over the past two-and-a-half months. Focus will be on RBI’s assessment on inflation and growth, he says. He expects some steps on monetary transmission. However, he adds that it is best served by a rate cut than any other liquidity measure.

According to him, the Reserve Bank may announce some liquidity measures – either SLR or CRR cut. Governor Raghuram Rajan may also go in for a CRR cut and narrow the gap between repo rate and reverse repo.

Kapur adds that the RBI may not wait until next policy to cut rates. He does not expect a dovish policy tomorrow.

Below is the verbatim transcript of Gaurav Kapur's interview with Sonia Shenoy on CNBC-TV18.

Sonia: Do you as well expect that the repo rate will be left unchanged tomorrow and what are your other expectations from the policy?

A: Repo rate will be left unchanged tomorrow. You have already seen 50 basis points cut in the last two and a half months, so the expectations around this time would be as to what RBI is first of all thinking in terms of the assessment for the coming year both in terms of growth and inflation, inflation more importantly because now that Reserve Bank of India (RBI) has officially been given the remit to continue with flexible inflation targeting and of course we are expecting some steps from the RBI in terms of improving monetary transmission and that to my mind actually is best served by a rate cut itself more than any liquidity measure because if RBI only wants to ensure that repo is the only policy rate which it wants to maintain and that is the only one single policy rate which is with single policy and single objective, single policy rate and single objective, in that case the signal through rates would perhaps work better than through liquidity measures per se.

Q: You were mentioning that although you believe that there won’t be a rate cut tomorrow there will be liquidity measures that the RBI will undertake. What could those measures be?

A: It could be either a Statutory Liquidity Ratio (SLR) cut or a Cash Reserve Ratio (CRR) cut or in fact I would say that there is some amount of perplexing situation where they cut the CRR and narrowed the gap between reverse repo and repo which means actually raise the reverse repo, bring it closer to the repo which essentially kind of ensures that if there is excess liquidity build up or if liquidity conditions do ease with CRR cut or with unsterilized intervention by the RBI, the overnight call money rates do not on a weighted basis fall closer to six and half percent and get a floor at seven. So you are pretty much in the band of seven and half percent. So, some of these in terms of liquidity measures one of these could be used.

SLR cut having fairly large borrowings programme and considering that the RBI has already cut it quite aggressively over the last year or so that may not happen. So, some guidance on monetary transmission is necessary at this stage, though I feel that you have only seen about two rate cuts, banks are in the process of cutting deposit rates. In due course of time, starting April you will start seeing that impact on lending rates as the appetite for credit off take among banks improve a little bit in the new financial year.

So, transmission to my mind is something that RBI would address as well. While I agree that there is no point waiting and I am of the opinion that if to my mind there is a 50 basis points rate cut space and in my opinion it will be front loaded. It would happen in the first half of the financial year perhaps the next, if not tomorrow then certainly mid policy the RBI may not actually wait till the next policy to cut rates. They may want to see how inflation expectations are panning out. Inflation expectations survey numbers I presume would be with the RBI now. And of course the assessment of the Fed actions which at this stage may not drive their decisions but as you approach June that may carry more weight than they do right now.

So on the whole the policy stance would be balanced. I don’t think it would be largely dovish because RBI views the rate tool to signal whereas their statements have been fairly balanced. So there are actually a number of risks on inflation as well which may depending on how, for instance, monsoons especially in case of India, food inflation particularly how things pan out over the next three to six months. That may change the inflation outlook. As it is in the second half of the year you might see inflation picking up on account of base effect. So, there are to my mind what would be more interesting is what the RBI actually says instead of just their action - the overall assessment from a new financial year perspective and in a new monetary policy regime. 

First Published on Apr 6, 2015 03:17 pm
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