RBI Governor Raghuram Rajan stuck to his script by keeping policy rates unchanged and cutting statutory liquidity ratio by 50 basis points to 22.5 percent.
Taimur Baig, Chief Economist, India Global Markets Research, Deutsche Bank AG believes this is a reiteration of what the Reserve Bank has been doing defacto. RBI has eased its policy stance to some extent already indicating that if inflationary conditions are extremely benign, there could be more allowance for easing rather than an outright rate cut.
Meanwhile, in an interview with CNBC-TV18, Sonal Varma, Economist, Nomura Financial Advisory & Securities (India) says the SLR cut has to be seen enabling sufficient credit availability once the cycle picks up. She sees this guidance slightly on the dovish side as the Reserve Bank has adjusted for the base effect by enabling a headroom for a cut if there is more to disinflation.
Below are excerpts from the interview:
Q: If disinflation is faster than anticipated it will provide headroom for easing of policy stance. I do not see anything new. Would you call it a slightly more dovish statement or as exactly as April 1?
Baig: This is a reiteration of what they have been doing defacto. If you look at the effective interest rate between the term repo auctions and the reverse repo activities that has been going on, on the term side, they have bought the effective rate down by about 40 bps since April peak. Therefore, from that perspective the RBI has eased its policy stance to some extent and perhaps that's what they are talking about that if indeed inflationary conditions are extremely benign there could be more allowance for that sort of easing to take place as opposed to an outright rate cut.
Q: Is this an indication that the RBI stands ready to help growth?
Baig: It's symbolic of precisely that and liquidity would become an issue if we do indeed see a very short pickup in credit demand which everybody expects on the back of likely infrastructure projects being fast track. So, from that perspective given India's savings rate has declined substantially in recent years and the current account deficit has come down, where will the liquidity and savings come from perhaps all the system like savings can be unleashed through cuts in cash reserve ratio (CRRs) and SLRs and perhaps that's all the RBI is willing to entertain for the time being.
Q: Can you comment on everything on the fact that policy rates have been left unchanged, SLR has been cut and there is this slight indication that if disinflation were to pick up pace then they would get a headroom to ease the policy stance?
Varma: On the SLR cut, if the starting point at 5 percent growth at a credit deposit ratio of 77 percent then as economy and credit growth picks up, there would be liquidity constraints in supporting the credit needs. So in a sense this cut has to be seen in that perspective of enabling a sufficient credit availability once the cycle picks up and also sort of sending signal to the government that fiscal consolidation is something that the RBI is assuming because one would have thought that the RBI would wait for some signs of fiscal consolidation from the government and then gone ahead and done an SLR cut but they have not. So I am assuming that they assume that fiscal consolidation has to be there.
I think on the guidance, it is slightly on the dovish side because in the last policy they had said that they will look through the base effects in the second half of the year and this time they are going one-step forward and saying adjusting for the base effect if there is more to disinflation then there will be room for cut. So clearly, the bias which was hawkish until three months back has become neutral with a slightly dovish bias if inflation pans out lower than what they are projecting.
Having said that, I think it is a bit premature for the RBI to be signaling a rate cut at this juncture. We need to see consolidation from the government, we need to see MSPs being low, we need to see rural wages continuing to come down. So for the RBI to be so early signaling that they will start cutting rates as soon as there is disinflation seems to be a bit premature to my mind.
Q: Final thoughts, you were a little critical whether the dovishness was premature, what is your final takeaway from the policy and what are you likely to tell your investors?
Varma: I think broadly, life doesn't end in January 2015 when we have to hit the 8 percent target. We have to go from 8 to 6 and monetary policy has to be stable. Let us assume that inflation comes in 100 bps below the RBI's target. So there will be room for rate cuts but next year because growth is picking up, construction sector is doing well so real rural wages start to pick up again and then instead of 6 percent we are closer to 6.5-7 percent. So then we should cut rates next six months and then hike again? In 2015, clearly not, therefore what we have to focus on and what the monetary policy has to focus on is whether on a sustainable basis we are continuing to see disinflation even as the economy recovers and whether we are on track to meet the 8 and then the 6 percent target also in the next one and a half years. So from that perspective, I think irrespective of what the RBI is saying, it looks like it is going to be a status quo for quite sometime.
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