No strong case for CRR cut, headroom for easing low: HSBC

Despite the growth slowdown in the country and the liquidity constrains, Leif Eskesen of HSBC Global Research tells CNBC-TV18 that there isn’t a strong case for a cut in cash reserve ratio from the Reserve Bank today. “I don’t actually think there is necessarily a case for cutting rates either, but nevertheless we think they would still do it,” he added.

Eskesen believes the Reserve Bank will be influenced by global events, mainly the unresolved issues in the eurozone, and will signal easing on account of weak economic data.

GDP growth for the fourth quarter of FY12 came in at a nine-month low of 5.3%, and industrial output for May has not been encouraging either.

Going forward, Eskesen says the RBI will deliver a maximum of 25 basis point cut for the rest of FY13 if they deliver a 25 bps cut today.

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: Is the case strong for RBI to cut CRR aggressively today?

A: I don’t think the case is strong, but it could be argued there is a case. You still have the liquidity deficit above the comfort zone, so there maybe sort of further push on that side. But it’s by no means a clear-cut. On balance, the probability of a policy rate cut is higher, and they would probably continue with more open market operations.

If you have the liquidity deficit blowout further, then certainly the case for that on the table again is somewhat higher. But I think the key thing is probably for them to signal some easing in monetary policy on the back of weaker growth and hence should we say less pressures on core inflation.

But at the end of the day, we don’t think that one way or another you are going to get much traction on growth based on easing monetary policy, whether you do it through a policy rate cut or you do it through a CRR cut. Ultimately, constraints are supply related in nature.

Q: The last time around the rate cut was large, but the guidance for the rest of the year was at poorer opposites to it. Even if they don’t move too much on rates today, do you expect them to guide to that that the second half of the year is looking much easier in terms of policy action?

A: No I wouldn’t think so. I think they would be consistent with what they said last time around and also would be consistent with the reality on the ground. As we have pointed out many times before, we see a significant portion of the slowdown in growth and India really tying up with supply side constraints being the factor that’s dampening growth. So that basically means that you still have very tight capacity.

In our assessment, there is not really an output gap in India. The backlogs of works are still increasing. In other words supply side constraints are still very much in place. If you begin to tease up demand too much, you very quickly end up teasing up inflation pressures in the economy and I am sure that RBI is cognizant of that that they still see a very limited room.

In our case, if they cut by 25 bps today, we think at most an additional 25 bps would be in the cards. Even if they do that, in my view it would still be associated with inflation pressures. I don’t actually think that there is necessarily a case for cutting rates today, but nevertheless we think they would still do it.

Q: Do you think the fact that we haven’t had a very ugly outcome to the Greek election results and that the monsoon hasn’t started off quite as well as people would have expected will weigh on the Reserve Bank’s mind at all? Do you think any of these two factors might stay the RBI’s hand and we might get a surprising no move at all?

A: I don’t think either in themselves would necessarily discourage them. The Greek elections of course in the short-term provides some relief on that front, but Greece still remains in a very challenging situation in terms of having a contraction and a big debt overhang. There are still big unresolved issues on a pan-European sense in terms of dealing with the crisis, so the downside risks to Europe are still there.

On the monsoon, it’s a bit too early yet to really act on that alone. So I think they would monitor, but they would not one way or another be swayed by it at this stage.

Q: There has been a pretty dramatic come off in the bond market. If indeed the focus remains on liquidity management for the Reserve Bank as you said, what would you forecast for the second half of the year in terms of where yields could move?

A: I think a lot depends on I would say global economic conditions. But the scope for further monetary easing is not very significant because of supply side constraints. In my view, that also means that inflation pressures will still be relatively high.

We don’t expect inflation to come off below 7% anytime this year, so you still need yields to pick up on that side. So I don’t think there is much scope for yields to come off to be honest from where we are now.