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N S Venkatesh, chairman of the Fixed Income Money Market and Derivatives Association of India (FIMMDA) and head of treasury at IDBI Bank, believes the Reserve Bank of India (RBI) could take a pro-growth stance and cut rates further in FY14. In an interview to Neelasri Barman, he says repo rates might be cut by 75 basis points. Edited excerpts:
Do you think the tapering of inflation and the recent fall in commodity prices give RBI enough comfort to cut repo rate further?
Headline inflation has come down, core inflation is below four per cent, the consumer price index (CPI) numbers, too, are showing signs of coming down and growth remains weak. In the light of these factors, the central bank might take a pro-growth stance and we should see some rate cuts. For 2013, we might see 50 basis points of rate cuts and in the financial year (FY14) there could be a 75-basis point rate cut.
How big a concern is CPI, as it still continues to be high?
RBI has taken a lot of steps to bring down the wholesale price index (WPI). As far as the CPI is concerned, the major portion is coming from food inflation. Food inflation has a limited impact due to RBI tightening the monetary policy. It is essentially a supply-side issue. Food inflation is coming from supply bottlenecks and there the government has to step in. The monsoon also plays a very important part in managing food inflation. A good rabi crop will cool off food prices and that would result in CPI falling to single digits. Then, we might see CPI coming down to 7.5-8 per cent this financial year.
When do you see RBI cutting the held-to-maturity (HTM) limit?
The main purpose of cutting the HTM is that it will bring in more bonds in the available-for-sale (AFS) and held-for-trading (HFT) basket, resulting in more bonds for trading. When the statutory liquidity ratio (SLR) has been cut from 25 per cent to 23 per cent, there is definitely a case for cutting the HTM from 25 per cent to 23 per cent. Having said that, the request of market participants will always be that they are given advance notice and time to prepare the market. The reduction could be done in a non-disruptive manner. This is probably one of the right times to reduce the HTM because we are moving towards a lower interest rate regime, due to which bankers also do not have much of a worry from their fixed income securities portfolio.
When can the Street expect in the new 10-year benchmark government bonds?
Generally, there is a perception in the market that if the outstanding is about Rs 70,000 crore, the case right now, the bond could soon become illiquid. But there is nothing called a limit for the outstanding. We might see the new benchmark after the monetary policy next month.
The current 10-year benchmark government bond is no longer the bond with the highest volume. How do you view this situation?
It is good to see as a market participant that other bonds are also getting traded. It gives the market alternative bonds to trade, with higher volumes, which results in the market maturing.
