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Indian CEOs and CFOs were a disappointed lot with the Reserve Bank of India (RBI) leaving the key interest rate unchanged at 7.75 per cent at its bi-monthly monetary policy review on Tuesday.
But CEOs said the introduction of new interest rate futures (IRF) tenure would increase the depth of markets and flexibility to market participants and the intention to formalise the optionalities in foreign direct investment (FDI) is a welcome step.
“The operational freedom on limits for corporates to hedge through the exchange traded currency derivatives (ETCD) up to 100 per cent of actual of previous year or average of three years will deepen the participation level,” said S Parthasarathy, chief financial officer, Group CIO, EVP — Group M&A of auto major, M&M.
The CEOs say though RBI has pushed more liquidity into system by reducing the statutory liquidity ratio (SLR) by 0.5 per cent, the cost of funds is still too high and corporates will hesitate taking loans for new projects at this high cost.
The SLR is the portion of deposits banks must keep invested in government bonds or other assets specified by the central bank.
“The Indian corporates were expecting a rate cut in view of sustained low Consumer Price Index (CPI) and Wholesale (Price) Index and food inflation coupled with benign oil prices in global market helping a positive CAD (current account deficit). In my opinion, this was possibly the best time to have a rate cut and give a real impetus to the growth, which is yet to take off in Indian economy as of today,” said Prabal Banerjee, president (international finance), Essar group.
“The RBI has taken a very positive step towards liquidity infusion by reducing SLR by 50 basis points, but that liquidity may be difficult to avail of by everyone and give a real push to growth and economy unless it is associated with moderate cost. We look forward to more positive surprises from RBI as it happened in January,” he said.
When RBI cut the rates in January this year by 25 basis points in a surprise move, top corporate leaders cheered the move and were clamouring for more rate cuts in the months ahead to help revive growth. The CEOs are expecting at least a 300 basis-point rate cut by 2015-end.
Parthasarathy said Tuesday’s policy can best be described as “RBI remains consistent and industry remains concerned”.
“As an industry player, given the current stress and need for stimulus, a rate cut would have been welcomed by us. A monetary push would have helped growth. After having focused on the health drivers (like fiscal consolidation, current account position, inflation trajectory) it could be argued that the RBI should now focus on growth drivers. The RBI Governor began the action on January 15, and a continuation of this action would have been a tailwind for growth and demand,” he said.
“The RBI had its finger on the button, but chose pause, we had expected them to go for another cut. However having said so, we do appreciate that the RBI has shown consistency in the stand they had taken to avoid flip-flop. We welcome other regulatory and financial changes and we are sure it would reduce the interest rate and currency volatility.
The CEOs say the rate cut is important given that oil prices are falling, the WPI (Wholesale Price Index) is at zero, CPI-based inflation has been at 5 per cent or lower and CAD (current account deficit) is low. RBI should cut rates with a sense of urgency, CEOs had said.
According to CII President, Ajay Shriram, the RBI is taking a cautious approach and a modest 25 basis points cut would have further lifted sentiments and assured the markets that the monetary easing cycle is on course which would be followed by further cuts in rates during the course of the year. "The lowering of the statutory liquidity ratio by 50 basis points would ensure that funds would be available to the banking sector for onward lending. This, in turn, would provide a fillip investment and growth,” Shriram said.
The recent change in inflation dynamics, particularly the steep slide of global oil and commodity prices and current account deficit under control, there is enough space to maneuver policy in favour of growth and CII is hopeful that the RBI would resume its accommodative monetary policy stance in the next policy review and work in tandem with the government to bring the investment momentum back to the economy.
Other say the ongoing fall in inflation is structural and sustainable and if the government also delivers on fiscal consolidation as expected, there is likely to be further easing by the RBI post the budget.
“Going forward with benign inflation, I expect reduction in interest rate by around 75 basis points over the next few quarters, which would be an important catalyst for pickup in the investment cycle and GDP growth,” said Dinesh Thakkar, CMD, Angel Broking.
Bankers were a bit more sanguine. "RBI policy was in line with market expectations of a status quo. The SLR cut is expected to provide growth supportive liquidity of about Rs. 45,000 crore. The flexibility regarding the DCCO will enthuse companies with strong balance sheets to consider taking over stuck projects," said Arundhati Bhattacharya, Chairperson of State Bank of India, the country's largest bank by assets.
"With inflationary expectations at a 21 quarter low and coupled with a benign global environment, we are in the early phases of a prolonged rate easing cycle," she added.
Mrs V R Iyer, Chairperson and Managing Director of Bank of India, said the central bank's tone on inflation was "dovish" and RBI expects it to be below 6% by January 2016. "The policy is pro-growth," she said in a statement.
Nirakar Pradhan, Chief Investment Officer at Future Generali India Life Insurance, said "“After a 25 bps cut in repo rate 2 weeks ago, the Reserve Bank of India (RBI) has expectedly maintained status quo on the repo rate while cutting SLR by 50 bps to 21.5%. It maintains that any further easing would depend on the data that confirms a disinflationary glide path and high quality fiscal consolidation. If inflation trajectory remains benign and the Government sticks to its fiscal deficit targets, there is a strong chance of further rate cuts by RBI. With positive domestic macroeconomic developments and RBI’s stance clearly turning towards easing of liquidity and policy rates, both equity and debt markets are likely to benefit in the year ahead”.
