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RBI's proactive move to guard 4% inflation target very impressive, says JPMorgan's Sajjid Chinoy

RBI's proactive move to guard 4% inflation target very impressive, says JPMorgan's Sajjid Chinoy

RBI's proactive move to guard 4% inflation target very impressive, says JPMorgan's Sajjid Chinoy
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By Latha Venkatesh  Jun 7, 2018 6:35:31 AM IST (Updated)

The fact that Reserve Bank of India (RBI) has moved proactively to guard its four percent inflation target over the next year, I think it's very credible and impressive, said Sajjid Chinoy, Chief India Economist, JPMorgan.

The fact that Reserve Bank of India (RBI) has moved proactively to guard its four percent inflation target over the next year, I think it's very credible and impressive, said Sajjid Chinoy, Chief India Economist, JPMorgan.

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He said RBI is clearly taking cognizance of the inflation risks in the last two months.
PK Gupta, Managing Director, State Bank of India, said that surplus liquidity mode in market won't transmitted on to the deposit rates or to the lending rates immediately.
Edited excerpts:
You think it was a great negotiating game within the Monetary Policy Committee (MPC)? You saw the Reserve Bank of India (RBI) governor saying, okay Ravindra Dholakia, I will do the rate hike but on your behalf, I will keep the stance neutral and you tell Viral Acharya and Michael Patra that for your sake, I am hiking rates, but I have to keep the flock together and so neutral. You think this is a great game of managing the MPC?
Chinoy: I would not over read that. What is impressive today is we had a unanimous decision, number one. Number two, the RBI is clearly taking cognizance of the inflation risks in the last two months and number three, everybody around the world had said inflation targets really get tested, when central bank's are prepared to raise rates to meet their target. So, the fact that the central bank has moved proactively to guard its four percent inflation target over the next year, I think it's very credible and impressive. I think that is what we should focus on. Let us not get to hung-up over neutral versus a tightening stance,  because frankly, neutral stance did not preclude the RBI from raising rates today and will not preclude the RBI from raising rates in the future. That is the most important point.
What the central bank was trying to communicate was in an environment, where monetary conditions have already tighten so much, there was no really useful need to scare market by signaling that they are on cause to a series of rate hikes. I don't think the data flow would support multiple rate hikes. We believe there is one more hike perhaps in the pipeline in the next couple of meetings and given, where global conditions are, oil prices are moving $2-3 everyday, who knows what is going to happen in a couple of months. The central bank should keep all options open. I agree with the RBI governor that there is no contradiction here between being neutral and raising rates. Therefore that does not preclude a rate hike in the future as well.
Rather than the minutes, I wanted to know whether MPC has slightly overestimated growth and slightly underestimated inflation?
Chinoy: Again, these are judgments we all have to make. Our own sense is that growth may not be as strong as the MPC forecast for number of reasons. If oil stabilises around $75, that is a meaningful adverse terms of trade shock compared to last year. It is almost 30%. Number two, financial conditions have already tightened meaningfully in the last two quarters and that will have an impact on activity going forward. Number three, we are still in the middle of a deleveraging process. So, we don't foresee bank credit growth picking up in any meaningful manner.
Our own sense is that growth will go from 6.7 closer to 7.1 next year, which is less than what the MPC estimated. I think, the key however is to look at where inflation is going to be in the first quarter of 2019. I think, what some may have missed is the second half forecast was marked up to 4.7, but there are two important distinctions here.
October to December has got strong base effects, which depress inflation, so implicit in that markup is the fact that January to March forecast to be above 5%. I think that is the key here that the MPC is implicitly telling us that it sees inflation in January to March quarter, which is the first clean quarter of inflation without any base effects at 5%.
This would be ex of MSP isn't it? So once you know the MSP number there is an upward bias?
Chinoy: That is right, so those were the two points I was making that number one, once you adjust for the base effects from January to March, inflation is now above 5% in the MPC's judgment and number two, that this does not have the MSP increase. This tells us me that despite the fact that we think growth doesn't pick up as much and therefore, I don't think the kind of momentum you saw in the core can continue forever. Despite that slowing, I think the MPC will have to move again.
We have seen that they have been very data dependent, whether they move in August or October, I think it will come down squarely to where is core inflation in next few months and what happens to oil prices. Our base line case is having moved in June, the MPC has bought themselves some space. I think by October, we will have a much better read on the monsoon and on the MSP increases. So our base line case is we get one more rate hike in October, but that could easily move up to August, if the next two data prints have very sharp core momentum.
There are several things for banks in this policy. There is of course the rate hike but there is an Liquidity Coverage Ratio (LCR) carve out, there is as well state government securities which now have to be marked to their true value and not just 25 basis above G-Secs. So, net-net does it leave banks a little poorer?
Gupta: I don't think so. If you look at the overall market, as of today also the market is in surplus liquidity mode. I don't really think it gets transmitted on to the deposit rates or to the lending rates immediately. However, that is more a function of each banks liquidity position, that is how the banks have been raising their rates and other banks have been following them also. So, it will take some time before it really gets transmitted on to the deposit and lending rates.
As far as the LCR, the 2% additional carve out that has been made, I think that is a part of the overall transition mechanism which RBI has been following for a long time. We have already reached up to 13%, if you look at the total SLR requirement it is 19.5% and 13% is getting used for the purpose of LCR. So, it's a question of time when we have this entire thing getting met out of your LCR requirement. The overall market is still surplus there, I don't really think that any major bank has a problem on account of LCR but there could be a few private sector banks who could be running a little short on liquidity, to them it will be little bit of a help that will come. However for most of the other banks this will not have any immediate impact.
However, the mark to market of state development loans, I think will have an impact on most of the banks. As of now 25 basis points above the G-Secs the mark to market is done. The original market rates are generally between 40-50 basis points above the G-Sec rates, so there will be some hit that the banks will take but they have said that it could be spread over the four quarters. So, if the banks do make use of that dispensation, impact on the P&L for this quarter may not be much but there will be some impact that the banks will have.
This munificence or forbearance given to Micro- Small and Medium Enterprises (MSME), now they can take six months to payback their loans, is that a good thing really? I am still worried that the system may not have coughed out all the demonetisation and Goods and Service Tax (GST) related problems of the MSME. So, is this forbearance legitimate or will it just push the can ahead?
Gupta: I think this is very important. Last time, when they had brought in this, that was only for one quarter. What they have done is, they have allowed it for a year more actually and there again there is a difference between the MSMEs who have Goods and Services Tax Network (GSTN) registration and those who don't have. So, the attempt is to push all the MSMEs to go in for GSTN registration. Again it will be withdrawn over a period of time. The fact remains that MSMEs do face lot of problems post demonetisation and GST. So, I think this is a very good move, they needed some help. So, we will be able to continue the dispensation which had come last time for one more year. So, I think this will be very helpful for both the banks as well as MSMEs and for the economy as a whole.
What is the percentage of the industry's exposure to these loans?
Gupta: The amount is very small. When last time this dispensation had come, quite a lot of people were not even willing to take it because it was available only for one quarter. However now that this will be available for a longer period, I guess people will be taking it because for the banks earlier it did not make sense to not classify an account as non-performing assets (NPA) on March and then classify again them in June. So, this is now much more meaningful and will be used by everybody.
I hope we don't get a shock at the end of next January because there could be accumulated NPAs, you don't worry that?
Gupta: No, they have said that it will be withdrawn in a gradual manner post January also. Only for the people who don't have the GSTN registration, it falls off but for others there will be a gradual withdrawal of this facility.
The PSL norms getting tweaked, will that make a big difference? Do you expect a lot of demand from the housing guys?
Gupta: It will actually. That is again a very big relief which has come to the banks. This is something which we had also suggested. There were lot of different definitions of affordable housing. So, what this does is, it aligns quite a lot of those definitions. Moreover, given the increase in the cost of housing, the definition which has come out now is very good. This will surely help the banks to achieve their Priority Sector Lending (PSL) targets and also focus more on housing. The demand in the housing sector post Real Estate (Regulation and Development) Act, (RERA) has been good, the portfolio has got risk mitigated, so the banks should be able to lend much more in this segment going forward now.
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