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    Government has done its bit, now it's up to the central bank: Srinivas Varadarajan, Deutsche Bank

    Synopsis

    "The government has stuck to the path of fiscal consolidation, at 3.5% the fiscal deficit has assuaged concerns that existed prior to the Budget."

    ET Bureau
    The stress assets issue needs to be fully resolved for a speedier transmission of interest rate cuts, says Srinivas Varadarajan, head of fixed income and currencies (India) at Deutsche Bank. In an interview to ET, he says transmission from banks that are not burdened with stress assets will be much better than those that have to manage stressed loans. Edited excerpts:

    Has the Budget changed investor mood in debt markets?

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    Certainly. The government has stuck to the path of fiscal consolidation, at 3.5% the fiscal deficit has assuaged concerns that existed prior to the Budget. Concerns over crowding out have also been allayed as the gross government (market) borrowings are less than expected. The government has done its bit. Now it is up to the central bank to see if there is space for further monetary accommodation. Increasingly, investors believe the government would meet its 3.5% target. Further down the road, the evolution of the 3% target would be of interest.

    Do you expect bond yields to come down, lowering borrowing costs?

    In the absence of any inflation shocks or events from the external side if inflation comes down sustainably below 5% by early 2017, then there is scope for yields to come down later in the next financial year. In the near term, however, the benchmark yield may come down to 7.50% from the current levels of 7.60-7.65%.

    How much rate cut do you expect from RBI in the next fiscal year?

    At the moment about 25 basis points. However, we have to be mindful of commodity prices, especially energy. The question is, whether they have bottomed out?

    What are the key risks to RBI’s accommodative policy stance?

    The key risks are really commodity prices, monsoon and a change in inflation expectations. Hopefully, after two years of weak monsoons, risks from that front should recede. Having said that, policy needs to get into a consolidation mode rather than an accommodative mode.

    When will banks cut more rates speeding up rate transmission?

    From a structural perspective, for fuller transmission to happen, the entire stress asset issue needs to be solved. This will take some time. Maybe by March 2017, by which time the entire stress asset issue would be behind the banking system. Transmission from banks which are not burdened with stress assets will be much better than banks which need to manage stressed loans. This is a structural issue. I am hopeful that with the introduction of the marginal cost lending rate from April, the cause for better transmission should be strengthened.

    Is cash crunch delaying rate cuts?

    It is recognised that the banking system’s behaviour to lending and transmission of policy rates does change depending on the nature of system liquidity. From a more contextual perspective, easier liquidity conditions are more helpful for monetary transmissions. It would be useful for the banking system to move from being a borrower of the marginal reserve requirement from the central bank window to being more neutral. However, this needs to be done in a calibrated manner. Eventually, banking system liquidity can be targeted to be neutral to slightly in surplus mode. To ensure that whenever the system goes into liquidity surplus, rates don’t fall at the lower end of the corridor — where rates are 100 basis points (bps) lower than the policy rate — a reduction in the width of the corridor can be considered from the current 200 bps to something like 50 bps.

    Will liquidity ease at the beginning of the next fiscal year?

    Seasonally, liquidity does improve in April. Typically, tax refunds happen in April. Moreover, the government’s surplus cash balance with RBI also diminishes as it starts public spending in the new fiscal year. This should also add to better rate transmissions.

    How will the rupee perform in 2016?

    We have good macro-economic fundamentals. We scored well in terms of inflation, fiscal deficit and the current account. So, the currency should be okay. Looking ahead, if inflation does not fall substantially, we should ensure that we do not appreciate on a real effective exchange rate basis. Some nominal offset would be required. We should also be mindful of exchange rate policies being pursued in the neighbourhood and other emerging markets.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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