 "'Less scope for further monetary policy actions'")
The Reserve Bank of India (RBI) today said there is less scope for further easing. "The headroom for monetary policy actions is much less than we had in the pre-crisis years or in the immediate post crisis period and we have to be watchful about that," said Governor D Subbarao in the post-monetary policy conference call for analysts and researchers. According to Subbarao, inflation is expected to edge up during the second half of the current financial year.
Subbarao agreed that despite the 100 basis points (bps) repo rate cuts in the last financial year and a further cut of 25 bps last Friday, banks' base rate have not come down in tandem. He said, "Base rates have not come down one-to-one, even as we cut rates by 125 bps, including on Friday. The model base rate has come down by about 50 bps. We expect the base rate will come down in the months ahead, even if in the next few weeks there may not be any action."
Liquidity situation and CRR
Although the central bank has not cut the cash reserve ratio (CRR) on Friday, and had announced open market operations (OMOs) of bond purchase after the close of markets, Subbarao said it would be wrong to assume OMO will always be a preferred tool for easing liquidity.
"The expectation should be, liquidity will be in deficit for the next few months at least," said Subbarao. "We will use all options available to us, depending on how we assess the liquidity situation to be. It could be OMO, it could be CRR, it could be something else," he added.
According to him, the liquidity situation would not be as bad as it was in the past few months. "Our objective is to maintain liquidity within +/- one per cent of the net demand and time liabilities (NDTL). We want to keep liquidity slightly in the deficit mode, because it is consistent with our overall stance. However, we recognised that over the past few months, it has gone above that +/- one per cent of NDTL limit because of frictional and structural factors," said Subbarao.
Current account deficit
According to the RBI governor, we were able to finance a higher CAD last year because capital flows had come in and there was enormous amount of liquidity. That liquidity could reverse quite swiftly, he said. "Even if there is no reversal of quantitative easing, if there is some shock in the Euro zone or in the US, there would have been a reversal of capital flows. We just want to rule out risk factors like that and that is what we tried to reflect in the risk factors as well as in our guidance," he added.
Extending market hours
RBI has received representations from participants for extending market hours for forex trade. According to RBI deputy governor H R Khan, this will have other implications as well, because forex market will not function independent of itself as it has linkages with market liquidity and other conditions. "We have to examine that proposal very carefully," said Khan.
On Indian hedging going to others market, he said RBI is trying to liberalise to attract investors to the onshore market. "Even in the currency futures market, we will permit FIIs (foreign institutional investors) subject to certain market conditions. We are also considering some other measures for simplification of documentation so that more people hedge and come to the onshore market. We are creating incentive structure so that corporates go for more hedging and the volatility on their balance sheet and volatility in the market is minimised," said Khan.
Auctioning govt's cash balances
The auctioning of the government's cash balances is in the discussion stage between the government and RBI, said Subbarao. He, however, pointed out that by auctioning this, there will not be a change in the overall liquidity situation.
"Instead of borrowing from the LAF (liquidity adjustment facility) window, banks will be getting these securities through some other window. Overall, it will not change the liquidity situation; it will change the costs to the government. We will come to a decision when we conclude our discussions with the government," said Subbarao.
Credit and deposit growth
RBI hopes this financial year would be better than the earlier one in terms of credit growth.
"On the issue of credit growth, the important thing to remember is we are predicting credit growth slightly above last year and you find that to be difficult to understand. But we are also predicting output growth to be a little larger than the last year. Therefore, I do not see much of a disconnect," said Urjit Patel, deputy governor of RBI. He added that in this financial year, the deposit growth may be better because, as inflation comes down, the real rate of return from financial products would rise.
No bubble on housing prices
In its Macroeconomic and Monetary Developments in 2012-13 report released last Thursday, RBI reported the housing price index was showing an increase. However, according to Subbarao, there is no bubble on housing prices.
Subbarao agreed that despite the 100 basis points (bps) repo rate cuts in the last financial year and a further cut of 25 bps last Friday, banks' base rate have not come down in tandem. He said, "Base rates have not come down one-to-one, even as we cut rates by 125 bps, including on Friday. The model base rate has come down by about 50 bps. We expect the base rate will come down in the months ahead, even if in the next few weeks there may not be any action."
Liquidity situation and CRR
Although the central bank has not cut the cash reserve ratio (CRR) on Friday, and had announced open market operations (OMOs) of bond purchase after the close of markets, Subbarao said it would be wrong to assume OMO will always be a preferred tool for easing liquidity.
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"The expectation should be, liquidity will be in deficit for the next few months at least," said Subbarao. "We will use all options available to us, depending on how we assess the liquidity situation to be. It could be OMO, it could be CRR, it could be something else," he added.
According to him, the liquidity situation would not be as bad as it was in the past few months. "Our objective is to maintain liquidity within +/- one per cent of the net demand and time liabilities (NDTL). We want to keep liquidity slightly in the deficit mode, because it is consistent with our overall stance. However, we recognised that over the past few months, it has gone above that +/- one per cent of NDTL limit because of frictional and structural factors," said Subbarao.
Current account deficit
According to the RBI governor, we were able to finance a higher CAD last year because capital flows had come in and there was enormous amount of liquidity. That liquidity could reverse quite swiftly, he said. "Even if there is no reversal of quantitative easing, if there is some shock in the Euro zone or in the US, there would have been a reversal of capital flows. We just want to rule out risk factors like that and that is what we tried to reflect in the risk factors as well as in our guidance," he added.
Extending market hours
RBI has received representations from participants for extending market hours for forex trade. According to RBI deputy governor H R Khan, this will have other implications as well, because forex market will not function independent of itself as it has linkages with market liquidity and other conditions. "We have to examine that proposal very carefully," said Khan.
On Indian hedging going to others market, he said RBI is trying to liberalise to attract investors to the onshore market. "Even in the currency futures market, we will permit FIIs (foreign institutional investors) subject to certain market conditions. We are also considering some other measures for simplification of documentation so that more people hedge and come to the onshore market. We are creating incentive structure so that corporates go for more hedging and the volatility on their balance sheet and volatility in the market is minimised," said Khan.
Auctioning govt's cash balances
The auctioning of the government's cash balances is in the discussion stage between the government and RBI, said Subbarao. He, however, pointed out that by auctioning this, there will not be a change in the overall liquidity situation.
"Instead of borrowing from the LAF (liquidity adjustment facility) window, banks will be getting these securities through some other window. Overall, it will not change the liquidity situation; it will change the costs to the government. We will come to a decision when we conclude our discussions with the government," said Subbarao.
Credit and deposit growth
RBI hopes this financial year would be better than the earlier one in terms of credit growth.
"On the issue of credit growth, the important thing to remember is we are predicting credit growth slightly above last year and you find that to be difficult to understand. But we are also predicting output growth to be a little larger than the last year. Therefore, I do not see much of a disconnect," said Urjit Patel, deputy governor of RBI. He added that in this financial year, the deposit growth may be better because, as inflation comes down, the real rate of return from financial products would rise.
No bubble on housing prices
In its Macroeconomic and Monetary Developments in 2012-13 report released last Thursday, RBI reported the housing price index was showing an increase. However, according to Subbarao, there is no bubble on housing prices.