RBI should focus more on transmission through bond market: Rupa Rege Nitsure, L&T Financial Services

In a chat with ET Now, Rupa Rege Nitsure, Chief Economist, L&T Financial Services, says RBI’s whole focus on coming out with term repos etc was to discipline the banking system and its liquidity management and secondly also to create various financial benchmarks. Edited excerpts

Mythili Bhusnurmath: Do you agree with my interpretation of the macroeconomic scenario and will the governor really cut more aggressively because the way things are, the ball is firmly in the RBI’s court?

Rupa Rege Nitsure: Absolutely. The CPI print as also the recent print was much lower than what all of us had expected, WPI has contracted for 15-16 months. Deflationary tendencies today are more acute and intensive than any risks to inflation. This is the last but very important opportunity for RBI to undertake aggressive rate cutting but having said that I also feel that rate cut has to be accompanied by significant liquidity easing measures because we are seeing that today. The systemic liquidity deficit is in the range of Rs 2.1 to 2.2 trillion which is quite huge and that has really created a huge upside bias in money market rate, CP rates, bond yields -- whatever easing you have seen is on the G-Sec side but corporate bond yields, CP rates have hardened considerably and that has raised the borrowing cost for many companies. Significant liquidity easing measures will be the only kind of medicine or antidote to create a benign interest rate environment in financial markets which would facilitate borrowing by sectors which want to undertake productive investments.

Mythili Bhusnurmath: This has been a puzzle for quite some time because while the RBI has been describing its monetary policy as accommodative. It has been keeping liquidity very tight and not just recently but for a considerable length of time. So is there some kind of contradiction between what the RBI says and what it actually does on the ground as a result of which even though it calls its policy accommodative, it is far from accommodative and this is why monetary transmission has not happened? What could be the reason for this apparent contradiction in the RBI’s actions?

Rupa Rege Nitsure: Thanks for asking this question because you know it is necessary for all of us to get into the actual nitty gritties of the whole problem. We are seeing that the major hurdle to transmission is state-owned banks and only with very severe moral pressures they were kind of forced to reduce their lending rates and for that they have reduced deposit rates more aggressively by 100-150 bps. The deposit rates have come down. On the other hand the base rates have come down by only 60-65 bps. Now personally, I feel that the problems of state owned banks are structural and situation will take one and a half to two years to normalise. Until then, Reserve Bank of India should focus more on transmission through bond market rather than credit markets because the problems in the credit market are structural and we do not have perfectly competitive financial markets and credit markets the way advanced economies have. So suddenly, it is like somebody is ill and you ask that person to jog, it is not going to help him health wise. You know first he has to recover from his disease and then only he can make a migration to a more normal regime. So I think if you take FY16, wherever we had seen investments happening, the corporates borrowed primarily from CP markets and corporate bond markets rather than from credit segments. About 74-75 per cent of the resources mobilised in FY16, were raised from the financial markets and not from the credit markets. The contribution of the non-food credit offtake in the whole of flow of funds metrics was just 18-19 per cent. So, the Reserve Bank of India should focus more on transmission through bond markets and that will happen only if they undertake liquidity easing measures. But having said that, I will not criticise their stance in the earlier monetary policies because you see they were also trying to discipline the liquidity management of the banking industry. Historically, for the last four-five years, Indian banks had created huge dependence on overnight mechanism because they were not planning their liquidity properly. So RBI’s whole focus on coming out with term repos etc was to discipline the banking system and its liquidity management and secondly also to create various financial benchmarks so that you know the deposit pricing or the loan rate pricing would be more scientific.

Mythili Bhusnurmath: What do you think the impact will be? Will the shift to MCLR (marginal cost of funds-based lending rate) from April make a significant difference? How much of a pressure will it put on banks bottom line and how much of downward movement can we expect in the base lending rate?

Rupa Rege Nitsure: As it is, we had discussed this issue on the show earlier also and I do not know in a deregulated interest rate regime, to what extent this kind of a formula based lending rate approach will be effective because banks have to take into account the risks involved in various kinds of lending. The problems of state owned banks are highly structural in nature. The real solution is to make them more competitive and for that government has to bring down its stake below 50 per cent and all that is going to take some time. So there will be marginal easing along certain loan products like say housing loans or some working capital related loans but I do not think that term finance related rates will see any drastic reduction. Some of the private sector banks have effected that but you also have to appreciate that their balance sheet structure is of a different kind, they have very high CASA support and more than 85-90 per cent of their loans are fixed rate loans rather than floating rate loans. So it is not going to be an uniform exercise for all banks and I do not think it will be highly effective.