The Reserve Bank of India (RBI) kept the key policy rates unchanged in its fifth bi-monthly policy announced on Wednesday. With no change in the rates, the repo rate remains at 6.50 percent while the reverse repo rate stands 6.25 percent. The monetary policy committee maintained the policy stance to 'calibrated tightening'. Five out of the six members voted to retain the stance.
The statutory liquidity ratio (SLR) will go down by 25 basis points every quarter from January-March, every calendar quarter, until the SLR reaches 18 percent of the Net Demand and Time Liabilities (NTDL), the policy statement said.
The SLR is being cut in order to align it with the Liquidity Coverage Ratio (LCR) requirement. Currently, SLR stands at 19.5 percent. One basis point is one-hundredth of one percentage point, i.e. 0.01 percent.
VS Rangan executive director, HDFC; Jahangir Aziz, head - emerging markets, JPMorgan; A Prasanna, chief economist ICICI Securities PD; Manish Wadhawan, MD and head - fixed income, global markets, HSBC India;
Prashant Kumar, deputy MD, SBI discuss the MPC meeting outcome.
Watch the full video here.
RBI Governor said that if there are no upside risks then space opens up for action. Are you expecting a cut in February?
Aziz: I am not expecting a cut in February but I am expecting that stance will change back to neutral in the February meeting.
RBI has vociferously denied that it reacts to external conditions but like any other central bank, they need to be very aware of what happens in February, how the global market re-prices Fed funds rate hikes and what happens to the 10-year US treasury.
I think global financial conditions will matter. However, if those remain broadly stable, I think the first thing that they would do is to move the stance away from tightening to neutrality.
7.44 percent does that pencil in a cut?
Wadhawan: First of all, though today's policy did not change the stance, other factors which were regarding the Open Market Operations (OMOs) and the statement by the governor on what can open up, markets have already started factoring in a cut maybe February or in April. If you look at the curves, it is already pricing in something now which is the next move rather than a hike which was anticipated till last policy.
Viral Acharya said increased frequency and quantum of OMOs may be needed till the end of March. What would you make of this and your thoughts on the previous quote of the governor as well, are you expecting a cut and what has the market already penciled in?
Prasanna: As far as the OMOs go, I would say this is the upper end of what most people would have expected in the market. One would have expected the RBI to slowdown in Q4 at least. The indication they are giving is that they are not willing to tolerate any core liquidity deficit, that is system liquidity adjusted for government balances.
So, by doing another Rs 40,000 per month, that is Rs 1.2 trillion in Q4, I think core liquidity will come closer to zero by end of March, I think that is what the RBI is aiming at and that is extremely positive for the bond market.
As far as the other comment goes, I am a bit puzzled at the way RBI has kind of handled this entire thing - one is they have adjusted the forecast but they did not mention this explicit guidance in the policy, it came later in the press conference, that is a bit strange.
Second, as any forecaster will know there are risks and you should be able to quantify this risk. So, I would think that even at this point in time when you talk about near-term risks, I am sure RBI would have been able to quantify, so it is a bit surprising that they are leaving it so contingent. For example, they could have even changed the stance in this meeting if they anticipated that the upside risks won't materialise.
So, last policy probably when they did not hike, I think they were probably forced to change the stance just to kind of maintain a balance and now probably they do not want to undo it in one meeting itself. However, it looks like by the next meeting at least the base case is that the stance will change.
As far as the rate cut, we are not expecting anything. In fact, we think a prolonged pause is the most likely scenario. If you ask me about the risk, it is in terms of rate cuts happening at some point, if not in February then by April.
Are you buying bonds at 7.44 percent and for that matter other corporate paper, are they still rich and can you see yields fall even further say by month end or fiscal year end?
Prasanna: 10-year probably there is some more rally to go, so it can come to 7.25 percent even without a rate cut expectation building in. With the kind of OMOs which RBI has promised just on the basis of that I think yields can come down further and if a rate cut expectation builds in then you have to see how much the curve is able to squeeze.
As far as corporate bonds go, there is quite a bit of opportunity there. So, probably what you have to realise is, the way this rally has happened, I think many investors have been left out of this. So, it is likely that instead of buying G-Secs, there will be more demand coming on the corporate bond market. However, at the same time, we have to be aware that for at least a couple of months that market was shut, which means that at the same time the supply will also go up.
So, the short answer is that a quicker movement will come in the G-Sec market but probably the rally in corporate bond market can be more durable.
You think 7.25 percent?
Prasanna: I think the 10-year will touch 7.25 percent, that is our expectation.
What would your estimate be of where yields could go give Viral Acharya's statement on OMOs?
Wadhawan: RBI has already done including December something like Rs 1.75 trillion worth of OMOs. If I go by Viral Acharya's statement of Rs 40,000 per month, it is minimum Rs 1.2 trillion and it total up to something like Rs 3 trillion worth of OMOs in the year, which is 75 percent of the net borrowing of this year.
So, a situation has got developed wherein it is pure demand supply and the net availability of the bonds in the system which is driving this. So, it can extend on the other side, so it would be very difficult for me to say as Prasanna is saying 7.25 percent, it could even go down further depending on the kind of inflation numbers.
On the supply-demand side, definitely, it is favouring the demand side.
The other factors would be that after today's policy, whatever is there we have priced in more or less what is going to happen in February. From hereon, it will also depend on how the oil behaves, how does the Fed rate hike gets priced in. So, now it will be day to day basis.
I would just also add on something that you said credit markets. Credit markets will not follow the same suit, what has happened in G-Sec markets, it is a complete re-pricing going on in terms of credit markets. I do not expect that the investors who missed out on this will suddenly go and jump to buy the credit papers, I think there it is a very different kind of story. So, the net-net answer is credit spreads may remain widen, may even remain more widened if the G-Secs rally but that would not percolate to credit markets immediately.
Now it is so much on the table in terms of a further direction of interest rates as well as the impact on bond yields. What is your sense will there be enough scope for banks to actually lower rates? Globally, the Fed even now is in a hiking mode but given the whole slew of factors - the RBI guiding towards getting into a neutral policy stance and providing abundant I mean Rs 3.2 lakh crore perhaps of liquidity, Rs 2 lakh crore already given does it open up possibilities of a drop in MCLR and drop in deposit rates?
Kumar: At present we are not seeing any possibility of a rate cut but if the inflation continue to be at the projections which have been given by the Reserve Bank and if the credit growth slows down then I think maybe going forward there is a possibility of a rate cut.
Why would you say credit growth is slowing down at all? Your weekly numbers that the Reserve Bank releases is only indicating higher growth and you are also gobbling up space given by the NBFCs?
Kumar: It is okay, but if you see the incremental credit growth in the last fortnight there is a slowdown. Overall if you see in all the economies if there is a slowdown in the growth part then maybe there is a possibility of a rate cut.
You are a big borrower from the wholesale market and that market is now 20 basis point cheaper in just two days, 10 basis point today itself. How does the cost of money look to you?
Rangan: Just to give you some background, we did a 10-year issue which you must have read out in the papers, we did it about week back which was 9 percent and that same bonds were trading at about 8.75 today. So that way yes, to answer some of the participants things, the so called credit spread have also reacted to that extent with the move in the G-sec and this thing.
So, that is to give you a perspective of what has happened in the last one week in between on something like a 10 year paper where the move actually makes a very difference to the holders of the bonds.
Is your sense therefore that given the promise of open market purchases (OMO) and the very dovish signal on policy posturing, do you think this 8.75 can go down further?
Rangan: I would believe it can go down further but all will depend upon to some extent as we discussed on how much of the borrowing comes back into the system from these corporates borrowers and others. But I would think that if the trend continuous the way it has been highlighted in the credit policy today we could see these levels coming down also.
Talking about liquidity situation in NBFCs, Viral Acharya said, there was almost a standby offer for a lender of the last resort facility. "Measures have collectively eased the funding stress in a steady manner over the past two months and they have given NBFCs and HFCs time and the opportunity to make their own balance sheet adjustments on both asset and liability side in particular improve the duration structure of their liabilities. The Reserve Bank also stands ready to be the lender of last resort but that is provided conditions warrant that sort of an extreme measure. In our assessment, there is no such necessity at the present." A statement like this would it be a reassurance for those who have put money in mutual funds and mutual fund managers who have put money in various commercial paper. If push came to shove there is almost a draghi moment here, we will do what it takes, and you don't think this reassures investors in fixed income funds?
Rangan: I would truly believe that this sentence of his obviously goes to reassure the market that from a liquidity point of view there won't be any slowdown or any sort of non-action by the regulator if the situation warrants so. To that extent, that statement itself means a lot of the investing community whether it is mutual funds or others will largely rely on the liquidity part for honouring some of their commitments from the corporates and others in their commercial papers and other investments.
There was one fund manager who told me that a few days back I thought it would take until two quarters maybe until March for this debt market problem to really settle down and come back to say August levels. But now I feel it is a few weeks' time this statement is so reassuring. Would you share that sentiment?
Rangan: I would probably share your sentiment in the sense, if you had asked me couple of 10 days back I would have probably said maybe in the end of the fourth quarter or so I would have expected the things to probably become normal and come to some terms in the period somewhere in August and all. But with today's statement, I think the move in the markets relatively the G-secs and others probably will say that earlier than the end of the fourth quarter.
This big pushing the envelope in terms of market development - asking banks to link retail loans to external bench marks will it handicap you because your cost of money is not benched marked but your lending rates are going to be, will you be able to manage this?
Kumar: This is one area which I think we need to discuss and debate upon. Because if you see the majority of our liabilities they are from the deposits, they are not from the market. So, in that scenario, our deposit cost would not be having any bearing on our lending rate. We are talking of the retail which is almost like 60 percent of our balance sheet and if they are linked to the external benchmark then we need to see how we are going to manage the profitability part. But this is something which we need to discuss and come out with certain measures.
I don't know if the NHB (national housing bank) will follow suite, logically it should? Why should only banks be offering home loans linked to external benchmarks, what if the NHB follows?
Rangan: I agree with Prashant Kumar that the liability side is relatively fixed for most of the payers and therefore to make the asset side floating against an external benchmark is going to be a challenge.
The key issue is that retail loan borrower may not actually understand a lot of these benchmarks and the way the volatility will happen in his interest rate would also be quite sharp. Today if you look at, the MCLR may change let us say 4 times in a year or maybe 5 times in a year. But if you really link it to the external benchmark it can change almost every month and also it can change significantly over one month to the other month. So, that is going to create a lot of volatility as far as the customer is concerned and is understanding is concerned.
I can see one bright side in this, which is typically for us people may start offering a fixed rate loans, 1 year fixed, 2 year fixed or 3 year fixed which can become more competitive or more attractive from a customer point of view also. So, you may probably have loan market coming back on a fixed rate basis and may not be for 10-year fixed or things like that but ideally, it could be one year, 2 year fixed type of market.
Let me come to the point where I was really irked. I know that there is something called this purity of principle, the Jan Tinbergen rule, that you use one instrument for one target or have as many instruments as you have targets. Is this the only way to tackle this liquidity leakage and the purchase of bonds? 3 trillion purchase that is almost 60 percent or 70 percent of all the bonds that will be issued by the government on a net basis. Is there not another way to tackle this? This seems like practically monetising the deficit?
Aziz: We can debate the purity of the measures but let us not forget that in the past RBI has regularly done this. This is not the first time and so every time the government has become profligate, hasn't brought down its fiscal deficit on its own sooner or later the RBI has come to its rescue.
This was done under previous governors, this is being done under current RBI governor and I don't really think that this practice is going to change until and unless there is an actual fiscal responsibility act or fiscal responsibility institution that curbs the hands of the government. So, we can go back and forth on whether this is right thing or the wrong thing to do but this is something that RBI has consistently done every time. So, just to give you a sense back in May I think we turnaround and said that look this year is going to be one of the largest OMO purchases given where the fiscal deficit was for the states.
Then why not CRR?
Aziz: I think on CRR - look it is down to about 4 percent so you want to keep some fire power in the event something extreme happens. I am guessing that the CRR cut to them is seen as a more permanent way of injecting liquidity rather than these temporary injections of liquidity.
What are your thoughts on this? Did they have another way out, is this like kind of succumbing to the government?
Prasanna: As an instrument, I guess you can say that open market operations are used by many central banks. I think the question is in which part of the curve you are intervening. So as long as the purchases are largely limited to the short end I think it is fair practice but the problem in India of course is that market trades only at that long end so the RBI is forced to buy at the long end also.
So, there is definitely a moral hazard here. But I buy your point. I think what you are saying is if you buy a 75 percent of the borrowing programme that what are the fundamentals getting priced. Then it is purely a demand –supply so one memo to deputy governor is he shouldn’t come a lecture bond market and how we are not pricing risk, whether it is inflation or fiscal deficit. Maybe they should look at the mirror themselves.
The second thing is the lesson to be learnt is that when RBI did OMO sales if you remember last year probably that was a mistake. It looks like, in India anyway currency leakage is fairly high and the BOP situation is such that over the last few years we usually have end up on an average way, end up with a very minimal balance so very minimal positive balance which means that the forex route is not there or RBI on a prolonged basis for them to add reserves. Which means that the OMO purchases is the only option. So the lesson to be learned is also not to do OMO sales and if you do that it kind of gets doubled actually.
First Published: IST