Hiking MSS limit a purely operational excercise: Suyash Choudhary, IDFC MF

In a chat with ET Now, Suyash Choudhary, Head-Fixed Income, IDFC MF, says total absorptive capacity of the RBI needs to be in the vicinity of the total size of the demonetisation which is around Rs 14-15 lakh crore.

Edited excerpts

We still do not know for how long this bond ceiling has been raised and coming within the same week as the Reserve Bank decision on CRR, what else can we expect from the RBI going forward considering the meeting is on the 6th and 7th of December?

This has to be taken as an operational exercise so if you just put numbers to the scale of this exercise, around 11 lakh crore of deposits have already come and the impression is that over the last three to four days, they have come at an accelerated pace against which the withdrawal is around 25%. So the net accretion to banking system liquidity is actually rising by a very large pace as against which the RBI has had securities of roughly Rs 7-7.5 lakh crore that they can use to mop up under reverse repo.

So as a first measure. the CRR was done as a temporary tool which absorbed another Rs 3,25,000 crore but the RBI was indicating that CRR could not have been a permanent tool and therefore a large increase in MSS had to happen in order to increase RBI fire to absorb the surplus liquidity.

One has to also understand that if the total absorptive capacity falls short of the actual liquidity in the system, then the overnight trades will collapse much below the repo rate which is never the intention of the RBI. So we would look at this purely as an operational exercise. The total absorptive capacity of the RBI needs to be in the vicinity of the total size of the demonetisation which is around Rs 14-15 lakh crore.

We are seeing a reaction in all the banking stocks. How do you think the money markets are likely to react and with everybody calling for rate cut, when it comes to the repo and the reverse repo, do you think we are still on track for that?

I would broadly think that the RBI has a framework now where they are comfortable so long as the inflation is around the 5% mark. They are comfortable because it is well within the effective band of 4% to 6% that they are targeting even though the official range is 4% plus minus 2%. The sense we get is that as long as there is excess capacity and growth challenges in the system, they are happy with the 4% to 6% band. The demonetisation exercise, however, temporarily constitutes a growth shock to the system. The quantum of this shock is something which economists are debating. So on the one hand, you have aggressive estimates of probably 200-300 bps getting shaved off but the consensus largely is we are in for a 50 to 100 bps impact for the next one or two quarters.

So on the margins everything else remaining constant, it would induce the RBI to worry a little more about growth given that inflation for the foreseeable future is well within the 5% mark. We would think there is scope for a 25 bps cut on the 7thDecember policy with the continuation of a dovish monetary policy stance.