Ananth Narayan, co-head of wholesale banking, South Asia, at Standard Chartered Bank, is of the view that the Reserve Bank of India (RBI) may either cut the cash reserve ratio (CRR) or indicate further open-market operations (OMOs) in the second quarter review of the monetary policy later this month. In an interview with Neelasri Barman, he gives an outlook on interest rates, liquidity condition, gilts and the rupee against the dollar. Edited excerpts:
What are your expectations from the RBI’s monetary policy review later this month?
The hope is for easy monetary policy. Given the concerns for growth, particularly on infrastructure investments, and stress in banking assets, the system would be better off with easier monetary policy, either by way of more liquidity being available or by way of key policy rates being brought down. We believe there is a case for a cut in the CRR by a further 25 basis points or indication of OMOs.
Last time, when there was a CRR cut, only State Bank of India reduced the base rate. Do you think further CRR cuts will help bring down the base rate of banks?
Easing liquidity conditions should eventually pass on to the end-customers as well. Easing liquidity will eventually reduce margin cost of longer tenor funds for banks, including certificate of deposit (CD) yields. From about 10 per cent in March, one-year CD yields have come down to sub-nine per cent. Yet, these yields are still high, compared to overnight rates.
Easing liquidity can help in bringing down this spread of CD yields over the overnight repo rate. Therefore reduce the marginal cost of funds to banks, which can then be passed on to the end-customers.
Banks are continuously reducing their dependence on bulk deposits. What are your views on this?
It’s a prudent trend, recommended by banking authorities, to reduce dependence on bulk deposits. The corollary concern, of course, is that bank balance sheets should not build excessively negative gaps in the process.
One underlying concern continues to be the lack of a term money market. While the CD market is reasonably liquid and robust, particularly in the primary issuance market, interbank term money markets are practically absent. A robust term money market can give banks added avenues to manage gaps, and provide transparent floating rate benchmarks to customers on both liability and asset products.
Do you expect further cuts in the repo rate up to March?
With signs that the fiscal deficit will probably be contained within 5.5 per cent, with lower probability of a rating agency downgrade, and a more stable rupee, we expect RBI to be comfortable with a 25-50 basis points cut in the repo rate by March 2013 to foster infrastructure growth. While inflation remains a concern, we believe a softer monetary policy can provide a fillip to infrastructure investments, which can eventually improve the supply side dynamics.
We would like to see measures such as directed refinance, that direct liquidity towards productive infrastructure investments, rather than inflation fostering consumption-based spending. We are looking at a 7.50 per cent repo rate by March.
What is your outlook on liquidity?
There will be some liquidity tightening this season, as we go into a busy season, and as festival-related seasonal currency withdrawals take effect. However, between government spending and RBI action on CRR and OMOs, expect liquidity to remain within RBI’s tolerance levels. We would like RBI to move towards a neutral liquidity regime in the current context, rather than one of permanent liquidity shortage.
The rupee has been very volatile against the dollar. What is your outlook?
The long-term prospects for India remain positive. Our demographics, our rising working population, our entrepreneurs, our middle class make India an attractive investment prospect. We are going through a tough phase at the moment, particularly since infrastructure investments have stalled, a real cause of concern. As things stand, between high trade deficits, a brittle global and political context, balanced by global liquidity from quantitative easing 3 (QE3), and favourable interest rate differentials, a range of Rs 50.5 to 53.5 seems indicated. If we can reignite the growth story, particularly in the infrastructure investment space, that would be time to turn bullish on the rupee, and look for levels in the rupee against the dollar below 50.
The government has decided to stick to its planned borrowing for this financial year. What is your outlook on the 10-year benchmark gilt yield?
With signs that the fiscal deficit will probably be contained within 5.5 per cent, with lower probability of a rating agency downgrade, and a more stable rupee, we expect RBI will be comfortable with a 25-50 basis points cut in the repo rate by March 2013, to foster growth. Expect the shorter-end rates to come down in tandem.
At the longer end, easy monetary policy and OMOs will likely overcome the pressure of a larger than announced borrowing programme, as the fiscal deficit is expected to slip beyond the budgeted 5.1 per cent of gross domestic product (GDP). The yield on the 10-year benchmark gilt is expected to move in the range of 7.90-8.25 per cent till January.
