RBI's moves not a surprise; rule out CRR cut: JP Morgan

Sajjid Chinoy, economist, JP Morgan isn't surprised by the Reserve Bank of India's move to restrict the limit of individual bank borrowing to 0.50 percent of its total deposits. He feels that these measures add credibility to its steps taken last week.

In an interview to CNBC-TV18, Chinoy he adds with these steps one can rule out the possibility of a cash reserve ratio (CRR) cut on July 30 monetary policy. “The very reason that they are doing these measures out of sync is precisely to try and avoid giving a much longer term signal. I think the government and the central bank is trying to achieve a delicate balance where they squeeze conditions at the short-end, but try and give the impression that this is not for the long haul, so I do not expect either a CRR hike or a repo rate hike for now,” he explains. Also read: How will RBI's moves impact banks? Below is the edited transcript of Chinoy’s interview to CNBC-TV18. Q: Reserve Bank of India (RBI) yesterday announced measures to curb liquidity. What did you read into those measures? Have you as well slashed targets in terms of your Gross Domestic Product (GDP) targets? A: I am not sure the measures were too surprising last night. If one reads the spirit behind what the RBI had announced last week, the idea was to really try and squeeze liquidity and that had not really happened over the last 5-6 days. So, the measures yesterday should be viewed as further squeezing liquidity to try and make that Marginal Standing Facility (MSF) rate, the operational marginal cost of funds. It is important that policymakers take the steps they announced last Monday to their logical conclusion for the sake of policy credibility, so last night was no real surprise. In terms of GDP growth, it is hard to say. It would depend crucially on how long these measures last. What the transmission is through the long end, what they actually do to funding cost for corporates. The risks to GDP are clearly on the downside, not just from the measures over the last couple of weeks, but from the fact that the exchange rate at these levels can by itself have an adverse impact on growth. Q: What do you expect to hear from the RBI at the end of this month? Do you think they are doing these things so that they do not need to touch the Cash Reserve Ratio (CRR) on July 30 or do you think there is still an outside chance that there could be explicit rate hardening in the next monetary policy? A: No, I do not believe that. The very reason that they are doing these measures out of sync is precisely to try and avoid giving a much longer term signal. One could have easily seen a CRR hike to achieve the same kind of liquidity squeeze that has been achieved through last night's measures. I think the government and the central bank is trying to achieve a delicate balance where they squeeze conditions at the short-end, but try and give the impression that this is not for the long haul, so I do not expect either a CRR hike or a repo rate hike for now.