RBI Policy: MPC likely to remain on hold for foreseeable future, says expert

He also does not expect any change in their home loan rates.

Sajjid Chinoy of JP Morgan said as expected there was no surprises from the monetary policy and it shows that the RBI remains data determined. The expectation is that they will remain on hold for the foreseeable future, maybe for one year as well, he said. "Given where we are on growth, fiscal, current account, inflation, core inflation, for me all of 2018 or most of it will be a comfortable hold by the RBI," he said.

However, according to rupee and bond market expert Ananth Narayan the markets were pretty much positioned for a hawkish policy. " I think the short positions in the market might get squeezed out a little bit given that liquidity is going to stay there for a while. Having said that, in the medium run, we have enough uncertainty which can take the yields higher.," he said.

Below is the verbatim transcript of the interview with Sajjid Chinoy, Ananth Narayan, Keki Mistry, Ashwani Kumar of Dena Bank, Sachchidanand Shukla, Ajay Srivastava of Dimensions Corporate Finance Services and Sunil Shrivastava of State Bank of India

Latha: What did you make of Reserve Bank of India (RBI) keeping the repo rate unchanged and upping of the inflation forecast and no change in action?

Chinoy: No surprise at all. I think both from the tone and tenor, all of us have been saying for a while that inflation for the first time in many quarters is on track to exceeding the RBI's existing forecast. So, at some level the decision was they signal upside risk or do they move the base line, and they have decided to move the base line. However, outside of that, really no surprises.

I think the tone is very similar. We had worried about core inflation going up in the last two months, they have signaled the concern on core inflation, fiscal risk have risen, they have signaled the risk on fiscal. So, really no new factors that haven't been documented before. You have to lay out those upside inflation risks with the fact that there is some slack in the economy which they point out. So for me this was a non-event of a policy and I think for the foreseeable future now the RBI will comfortably be on hold.

Surabhi: On the next expectations from the RBI, are we now -- because they have retained GVA, they have taken note of slight improvement in infrastructure, there is a bit of positivity there, yet the fiscal situation. So are we looking at a longish hold from the RBI? Do you see a move, either ways, in near future?

Chinoy: I think on an as is where basis, I don’t see a move in the foreseeable future at all. I think the way to think about this is if one believes as we do that inflation in 2018 is going to range somewhere between 4.5 and 5 percent, there will be base effect, so second quarter will be higher, third and fourth quarter will be lower because the HRA effect rolls off and the GST effect goes off. However, if you look at underlying inflation, it will be sort of 4.5-5 percent, then you subtract from that the 40 basis point of the HRA allowance which is the center alone.

So, if the RBI believes net of that inflation is at 4.5 percent or thereabouts, and core inflation is approaching that number, that number clearly is above the medium term 4 percent range and therefore will preclude any desire to cut rates, but that is not at threatening level, at least at these levels the RBI needs to worry about hiking. So, I think we are in this at some level comfortable hold for the foreseeable future range.

Now what could throw this off for me? I worry less about the fiscal, because that is a policy variable. I think track record of this government is very good, even if we find a little bit of slippage at the center this year by 0.2-0.3, my sense is we will still be on a consolidation path.

I think for me the wild card is oil. If oil were to tick up another USD 4-5 from here, because we have not seen these oil prices passed on, so I would argue the prints in November-December-January are not catching on the last 10 percent of crude. If oil were to stay at these levels and move up, then that creates more upside risk. Conversely, if oil were to drift back down to low 50s, then the debate will change again. So, I think that is the real wild card, commodity prices, for me. However, otherwise, given where we are on growth, fiscal, current account, inflation, core inflation, for me all of 2018 or most of it will be a comfortable hold by the RBI.

Latha: Your overall comments, you heard him through the press conference, does it look like - they are comfortable with 4.7 percent, looks like they won't hike even if inflation goes to 4.7 percent?

Chinoy: That is right, I think A) my take away from today is no surprises. I think the RBI remains data dependent and I think the reason you are comfortable with 4.7 percent is because they have acknowledged that 35-40 basis points of this, perhaps a little bit more if state HRAs are accounted, is this one time statistical impact. So net of that inflation is running somewhere between 4.3 and 4.5 percent, your goal is to keep inflation close to 4 percent but there is an acknowledgment that output gaps are negative so that is the zone in which you are very comfortable remaining on hold. There is no pressure to hike, there is no pressure to cut.

So I think right now I see a hold for the foreseeable future. My own sense for what it is worth is I think there are still some upside risks to inflation despite the RBI marking up its forecast. We actually see this quarter being closer to 4.6 percent, December could be 5.5 percent albeit driven a lot by perishable prices and I think what the RBI is hoping is in the winter, those perishable prices reverse. So the risk I still see is a little bit to the upside both because of food and because the last 10 percent of crude has not been passed on; when that is passed on it will be ripple effect in the system.

I do see a little bit of a downside risk to GDP growth in the second half of the year so that will be a little bit of buying for the RBI if next time they have to mark down GDP but mark up a little bit inflation but by and large in a zone now where I think the RBI will be on hold for the foreseeable future.

I will just make one more point because there has been much debate on whether they are comfortable with bond yields or not. To again ask them about liquidity and bond yields is to ascribe more targets than instruments. The RBI cannot simultaneously have a liquidity policy which has to go to neutral and have a view on bond yield because those could be internally inconsistent. The bond yield is what the bond yield is based on, demand-supply and the bond market interest rate expectations for the future and liquidity. So as long as the RBI is focused on liquidity, the bond yield is endogenous at some sense.

Latha: One number I want from you, when you keep saying foreseeable future, what do you mean? For one year they will not raise? Give me a time - one year, one quarter, two quarters?

Chinoy: Our forecast is inflation net of HRA being between 4.3 and 4.7 percent for the full year, net of HRA, if that is what is your inflation forecast is and growth is going to remain in this range, then I think in all of 2018 they will remain on hold.

Our own sense in house is that banking liquidity will go to neutral much faster once the advanced tax outflows are gone given where currency in circulation typically prints January, February and March. So we expect that by March, headline is in neutral or slight deficit but core liquidity is still in large surplus.

Latha: How would you read this upping of the inflation forecast and no action? From the way it looks, it does not look like there is going to be a cut at all if their trajectory works out because they reiterate their commitment to keeping inflation close to 4 percent on a durable basis. Bond yields, how should they move?

Narayan: I think this is along expected lines. A marginal shift in inflation is fine. We were expecting a hawkish tone to the policy.

Latha: Even the upping of inflation?

Narayan: If by 10 basis points, I don’t think it is the end of the world. We were expecting a hawkish bias even if they retained the old 4.2-4.6 percent range. The markets were factoring in a fair amount of bearishness. I can’t see where the market is currently, but even if it does pop up a little bit, I would be surprised if it sustains there. I think the markets will pretty much remain where they were before the policy. It will be interesting to see what they say at the press conference though.

Latha: It is at 7.07 now.

Narayan: So thereabouts, no real big change as such. I think this is pretty much expected. The markets were factoring in a hawkish policy and yes, nobody is expecting rate cut talk at this point in time. It was interesting to see that Dholakia was still voting for a rate cut, so, more power to him. The dollar-rupee I think just came off a little bit, again a little bit of hawkishness on policy rates tends to bring strength to the rupee. So, maybe you will see a bit of movement in the dollar-rupee. However, otherwise pretty much along expected lines.

Anuj: Let us just pull out the intraday chart of rupee as well because that was one market which looks strong as we discussed but now the dollar rupee has moved to the high point, the rupee has weakened, what would have led to that, it is a sharp spike if you see the intraday chart?

Narayan: Compared to the stock markets and equity markets, fixed income markets are pretty boring which is good for us. I think the rupee is playing in tandem with the stock markets. As we discussed earlier, bond markets had factored this in, it has already anchored by the fact that overnight rates at 6 percent, it is already a very steep curve, people are sitting short. Therefore, the probability of yields moving up from here in the short run are quite low and that is what is playing out. Rupee of course initially started off on a stronger note based on the hawkish policy, but if you have selling in the stock markets coming through which is possibly coming through with FII selling as well, it is going to impact the rupee markets as well. Even the bond markets make no mistake, I think in the long run, the yields could head higher, but it is just that right now the market is already factored this, positioned for this, and therefore it is not going to move too much.

Latha: You must have heard what Viral Acharya said about liquidity. Looks like they intend to keep it somewhat okay. What was your reading and where do you see yields go?

Narayan: Absolutely, I think he showed no hurry to bring liquidity to neutrality. Giving a timeframe of first half of the next fiscal year when neutrality is reached by its normal course of events, it is fantastic news and that is probably one of the reasons why you are seeing bond yields not going up from here. In fact you are probably seeing some short covering and yields coming down at this point in time.

So, liquidity will remain, it is not going to be a flurry of OMOs to drain it out and bring it to neutrality in a hurry. Where we did not get a clear answer was on whether they are comfortable with 10-year yields being where they are. 7.05 percent, one of the steepest curves in the world today, that particular aspect, I don’t think we got a clear answer, and frankly, you cannot expect a clear black and white answer from the RBI.

Latha: You think therefore yields will go to 7.1 percent, what is the sense?

Narayan: I think the market was pretty much positioned for a hawkish policy, I think the short positions in the market which might get squeezed out a little bit given that liquidity is going to stay there for a while. Having said that, in the medium run, we have enough uncertainty which can take the yields higher. I do think yields will eventually head higher going into the next year. There are fiscal question marks, liquidity will become neutral at some stage and of course the global context is looking pretty tricky as well.

Latha: What is your sense? Are market yields going to rise at all? Will you be borrowing slightly more expensive than you were before the policy?

Mistry: I think it was pretty much expected that there would be no change in interest rates, so in that sense I do not think anyone should be surprised with the fact that there is no change. Inflationary pressure is something which is worrying the RBI, crude prices also have inched up compared to what they were at the time of the last policy. So, given all of these increasing or reducing interest rates at this time was almost an impossible expectation. So one should not expect too much of -- I mean in the very short-term you may see some kneejerk reaction in the bond market but generally speaking I do not expect bond yields to go much higher from where they are.

Latha: Therefore, you do not expect that your home loan rate will increase?

Mistry: Certainly not.

Latha: You do not think it will decrease either?

Mistry: No. It will remain at these levels.

Latha: Do you think this is the end of cost of money falling? Would the cost of money rise at all with this policy or here after?

Shrivastava: At the moment, the inflation forecast have been marginally raised and the core inflation being one of the risks apart from fiscal slippages, we do not see the cost of money be increased or reducing very materially going forward, but with the oil prices being where they are and we are seeing signs of incipient credit growth, I would say the RBI has been neutral to cautious and I guess this is the right stance to take.

Latha: What is your sense? Do you think you will have to inch up rates at all, probably bring back savings rate to the old 4 percent or in any way, build a return on deposits increase or lending rates increase?

Kumar: As per the policy which has been announced on rates, it has been clearly mentioned that the stance is neutral and if you see the bond yields moving from 7.07 it has come down to 7.04 and maybe now slightly lesser. So I do not think there will be immediate pressure on increasing the deposit rates. Going forward, since there is a lot of global uncertainties there, if bond yields spike up, if the interest rates goes up, then there may be a case for interest rate increase in deposit, but as per the policy and as per the present conditions I do not see that any interest rate hike on deposits is required.

Latha: There is also suggestion that there is further scope for transmission. Do you see any cut in any kind of lending rate, housing, consumer finance, any of them?

Kumar: I do not think there will be a chance of cut immediately, 5-10 basis points here and there maybe there, but in general I do not see any reason for cutting the lending rates in housing or any other sector.

Surabhi: Your interpretation of the policy and the number of factors that the RBI enlisted while giving that upwards revision to the inflation projections? Which one of them could you say could perhaps be potentially fairly serious to see a breach of this range on the upside?

Shukla: Firstly I do not really think that this policy is more hawkish. The way I see it is that the previous policy was more hawkish and more conditional. What they have done is, they have just aligned their inflation expectations slightly with that of the market because everybody is now expecting surprises on inflation on the upside. Maybe the RBI did not really want to send shockwaves or scare the market, but I think they just gradually aligning the inflation expectations. The risk that I earlier pointed out, the fiscal slippage part is more of a meaningful scare for me because inflation prints, we all have been monitoring or we are all observing how the core or the core-core numbers have been very steady. We have been observing food price behaviour, but the real risk to me is the fiscal slippage from here on. In terms of interpretation, the real action now may be outside the policy which is liquidity management

Anuj: What do you attribute this weakness to? Clearly this is not policy driven. While we could say that the last bet on the Bank Nifty could be just because of that, but there has been quite a bit of weakness for the market. How would you look at that and do you think the buy zone is here or would you wait for some more correction now?

Ajay Srivastava: Three questions. One is you already saw the weakness was coming in the last week, 10 days. It got a little accelerated as partly the Gujarat polls which are coming out, the news from Gujarat was not looking very good. Partly also came out the fact that we had just crossed the peak season with a GDP growth of 6.2 percent or November-December is not the best month for auto industry, is not the best month for most industries.

So you should not see a dramatic uptick and more important, I think with this credit policy, if you have noticed it, I am not sure whether that has been into a sale in the market, at least for us it was very important. The body language of the governor was not talking of an economy which is confidently striding ahead. It was talking about caution, it was talking about I do not know what is going to happen.

It was talking about inflation, let me see, I do not think they had a response to the issue on the yields going up which essentially meant the RBI signal today is willing to let the yields go up or at least it does not have a clue how to bring it down. So I think when you look at the RBI Governor who says that I cannot give a comfort to the market that yields will come down or be addressed, you have got to sell and that is what is happening today.

Latha: What will be your attitude now to NBFCs? The cost of money is not going down and I would go by what Ananth, the man from the markets tells us that yields, if anything, will inch a little higher. So what will be your approach to NBFCs?

Ajay Srivastava: NBFCs, we must divide in two portions. The lending shots and the NBFCs which do fee-based incomes and other stuff. So you need to put them into two. Wherein the lending ones, they have been negative for the last four months. Our stance remains still negative for two reasons. One, the fact that the share volume of business that is coming towards NBFC is now starting to go down, competition is going up and they are not able to borrow at a much better price when compared to banks and other institutions, etc. So, you will find the net interest income (NII) of this thing will go down.

The volume fight is going on in the market, too many players. So our stance remains negative. On the fee-based NBFCs, our stance remains positive because more and more people, at least the high net worth people who are going to get a little disappointed with the mutual fund eventually will move towards alternates for investment structures, funds management, etc. So, these are the kind of companies which will give lot more traction and in this market, as we are now seeing, we have seen one thing is that one-way street is ended, market volatility is here to stay, yields and your returns on mutual funds is not guaranteed anymore. And that is very visible to everybody now.

Anuj: I ran a Twitter poll this afternoon and I got mixed response. What is the number one reason for this fall and where it could take us? Is it purely global in nature or is it the fact that we had just run up too much and we needed to cool off?

Ajay Srivastava: India's fall had started in the last 5-6 days. It was not fall actually. More than fall, it was not being that no smart investor was at least committing their capital to buy into the market. That is where the problem started that in the last week, 10 days, there was no major buying happening across the board barring some buying in, the buying was restricted to infrastructure stocks which was the category which most people do not look at even today.

So there was buying in that category. There was some buying in IT stocks, some value buying in pharmaceuticals. But if you look at the mainline stocks, there was no support. There was no support to Eicher, there was no support to the banking stocks. So in a sense, the big money, the smart money moved away from the traditional sectors of the market to sectors which nobody wanted to own at this point of time including the real estate sector.

That is what triggered the partial response. Even in the fall today, you will find the infrastructure sector has not fallen as much or most of them are holding steady the stocks, including the midcap stocks. It is banking which was out of favour, it was automobiles except Maruti Suzuki India of course, leave it aside, it is a godly, saintly stock, so we do not count it as a stock. But other automobiles are struggling a little bit.

TVS Motor Company, in spite of such a launch, struggling today. So I think the shift is changing to what people are buying. What people are buying does not have weightage in the index today, what people are buying is not on the headline charts today and what is on the headline chart in the index is being partly sold into or partly at least staying put. So you see a dramatic change in the allocation of capital which is translating into the market weakness.

Surabhi: Gujarat, a hung Gujarat. Has that been priced in, in this 4-4.5 percent decline? It is probably just 4 percent or could that be a fresh body blow?

Ajay Srivastava: I think it will be a body blow if Gujarat gets hung or below, it will be a serious body blow because not for the reasons that something is, because it has been an indictment to the government but what it says very clearly is that the direction of the economic policy which is what the market was valuing it at is not conducive to getting you the political votes. That is the crisis out there that this whole counsel economic policy was large corporations, large reforms, if that does not get bought into by regular people, by the common people and that does not translate into the votes, in a bastion like Gujarat, then you will hardly find traction elsewhere. So it is not about just losing of Gujarat, it is not about the uncertainty of Gujarat, it is also about the uncertainty of the policy continuity which will go forward.

Of course, on TV, they will say, we will do what is the right thing to do for the country, but the fact is if this fails in Gujarat, there is no chance of succeeding anywhere else. So therefore it is more policy impact driven than just Gujarat that this result will show. And that is why we are all waiting to see what the result will come about because if it is not so good, there is no one in the world who will predict that this policy, the way it is working will continue.

Perhaps, look at the other side is that a lot of people who have not invested, they will get an opportunity to invest. So there is no hurry to invest today. Anuj was asking why people are not, people are saying let Gujarat be out of the way, we need to get more capital, we will do it later. So in a manner of speaking, let this event happen. If it is a great positive for BJP, you will the market taking a 2-3 percent or maybe 4 percent upside. If it is a debacle, you will see a 4-5 percent fall and maybe continuous selling. You can get into it.

So work it whichever way. The thing is, from now till the 18th, you will not see major buying and that is why you will not see major shorting as well unless globally the market starts to again roll again and today's weakness gets into tomorrow and day after. But Indian investor will stay put, neither short, neither go long and then take big calls in the market. Globally of course, they will be on holiday, so it does not really matter, but local investor will wait and watch.