This Is How The Guv Steered Clear Questions Across The Borders

RBI governor has definitely a tough task in hand to maintain retail inflation at 5 per cent with food inflation being a major concern and also implementation of the 7th Pay Commission and rising crude oil prices promising to make their presence felt in the coming months. Rajan while making realistic statements on inflation and policy rates easily explained the importance of the uncertainties affecting the policy rates during the call. While maintaining that the uncertainties continue to remain on the inflation front with an upside risk, there also is a visible downside risk to inflation with a probable good monsoon season. It will be interesting to see how the monsoon pans out and whether food inflation helps bring overall inflation in control. Food articles constitute almost 45 per cent of the Consumer Price Index (CPI). Rising food inflation contributing to increase inflation levels will leave less room for the RBI to cut key policy rates in coming quarters. 

" I think this depends to what extent  you believe that quantities as well as rates influence inflationary expectation, of course the ECB takes both quantities and rates into account, many other central banks  just take policy rates into account as biggest factor influencing inflation. We are certainly of the view that quantities are not irrelevant but at the same time I think it would be a little premature to dub our policy easy liquidity. We are moving to a more neutral stance on liquidity and we have said that the pace at which we will move will depend to some extent on market condition as well as external conditions. Even now we are still at somewhat of a liquidity deficit overall  but we are moving to  a more neutral position overtime and we will play it by year as things go along. "

CRUDE PRICING:

Adding crude oil prices factor in his response, the Governor sounded confident of managing the current levels. 

RAJAN SAYS 

We do believe some factors are pushing up oil prices, probably had gone too low typical overshooting in an asset price, it has come back some way, what the equilibrium level is given the potential for shell to start producing once it reaches high levels is something that lot of people have opined on. We think that the current levels are manageable. Let us see. 

On Currency :- 

While several measures are being adopted by RBI to arrest volatility in currency, there are certain FCNR-B redemption issues which might create short term turbulence in the currency market and may lead Indian currency to depreciate further against US dollar.

RAJAN SAYS:

Our sense is that the leveraged portion of those deposits people have borrowed to invest in FCNR B deposit, that leveraged portion will not be renewed. There could be outflows possibly of the order of $20 billion or so. Now we have covered these outflows in the forward markets and before the maturation of the deposits we will take some advance deliveries in the lead up to the maturity. Now some counter-parties that we have contracts with are apprehensive that they may not be able to deliver easily on the dollars we are owed and hence there may be some episodes of dollar shortage in the market going forward. This is something we will monitor. We may supply dollars in case of extreme volatility.  But no one should take us for granted.

ON BREXIT:

Then the concerns over BREXIT also had flown in. The Bond of Indian economy eased the concern of the analyst hurling this question and this is what Rajan spoke out.

Certainly over the medium term, if in fact people in Britain vote for exit, it will create a turbulence in Britain's trade relations and investment in Britain and in the short run it could impact financial markets as people will revalue both their opinion of the UK economy as well as what will happen in Euro areas. Some peripheral areas may explore exiting.  

Facing questions from varied domains and analysts with different background, Rajan also had the tough task to comment on MCLR and its benefits.

But then Governor of India’s apex bank has all these days remains optimistic. Even mounting political pressure from ruling BJP’s certain quarters could not make it to dampen his spirits and serious sense of humour. Rajan finds the benefits of MCLR too and he explains:

" I think the attempt in our efforts is to make sure that the cut in policy rates are transmitted into lending rates. The significant effect will come from competition as banks find deposits building up and no good avenues to lend, they would complete to lend to viable clients at that point. That is yet to happen in a significant way. The transition to MCLR is the way to make sure that when this happens banks are prepared to transmit quite rapidly but it is the process we are going to monitor what banks are doing in more detail. We have some preliminary analysis and we will push them to make the MCLR regime viable. On the transition from the base rate regime to the MCLR regime for existing borrowers, I think it would be unfair on us to enforce a change in contracts on the relationship between the banks and the existing borrower because the existing borrowers have the ability to transition provided certain transaction cost and so on are paid. They also have the ability to borrow from different places, other places if need be."

Then there have been talks around MCLR leading to pressure on margin for banks and it becomes further critical these days when banks in India continue their struggle to survive. Practically, RBI recognises the fact that the transmission of policy into bank lending rates takes longer than justified. RBI is working out on MCLR  framework to iron out the issues. This may lead to timely infusion of capital into constrained public sector banks which will also aid the credit flow. There is fear though that the MCLR lending practices will shrink the margins for banks however if we give weightage to RBI governor's observation the volumes will more than offset the margins.

RAJAN SAYS

BANKS AND MCLR

"I think it is too early to say the margins are under pressure due to MCLR. As deposits build up and volumes in lending pick up we will see more transmission and at that point bank margins will be offset by greater volumes and I think that it would be premature to say that banks will be in a bad way as a result."

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Guv’s communication from an investor’s point of view

Bhagyashree Vivarekar carries out a review of the bi-monthly RBI policy review and then she communicates to our reader-investors through this piece filed from RBI headquarters.

On the 25^th floor of Reserve Bank of India (RBI) building here in south Mumbai, media crews from across the nation and even beyond were checking their equipment minutes before the clock struck 11am. Anxious television journalists were checking their earpieces and connectivity with their studios, print journalists were borrowing writing pens at the last moment while Principal Adviser of the country’s apex bank, Alpana Killawala clad in white saree was seen busiest in the auditorium interacting with media to ensure all goes well. Moments later, sharp at 11, dressed in a gray suit and light blue shirt, the man in demand, Governor of RBI, Raghuram Rajan entered.

Few miles away, at Marine Lines and adjoining areas, house of hundreds of trading firms, millions of traders were glued on the television screens, anxiously. Few more millions of individual investors were too passing through moments of anxiety. After all, it was second bi-monthly policy statement date. Crucial for the economy, more crucial for the stock markets and investors having their hard-earned money invested in various stocks.

Rajan started reading out his statement and yes, he did not bring any changes in prevailing rates as earlier believed by many. Not many surprises to take-away. But the markets started behaving positive and it had been green all over led by the public sector banks. On the eyes of storm, Rajan was at his best—after all, he is the Guv of the Central Bank and surrounded by controversies, kicked off by part-time but significant politicians, mostly from the ruling political outfit in the Centre.

So what all were the takeaways from the meet—

1. Monsoon: The only resort for now

All hands on deck, according to Rajan. Monsoon has to be the driving factor in the coming session for improving the set of macroeconomic numbers and thereby the markets. To curb further growth in CPI, the food price management along with the supply management by the government would help in achieving the 5 per cent target by FY17. Dis-inflationary pressures would rise only if monsoon plays well. 

2. SEBI: Discussion on the unfinished task

Rajan summarised that corporate bonds, liquidity infusion and cleaning up of banks’ balance sheets are still an unfinished agenda. Considering banks, the clean-up is already discussed with the SEBI chairman through right capital structure and credit incentives to the promoters. In bringing up the asset quality banks have made provisions of 15 per cent and would incur higher costs towards provisioning to improve the PCR. This states that for few more quarters the bottom-line earnings would stay muted. So investors, wait and watch.

3. Dollar apprehension: Dollar to reach new highs

When talked about the liquidity concerns, Rajan emphasised more on the FCNR (B) deposits wherein the outflows from maturing of such deposits in November would lead to around 20 billion USD to comfort markets and banks. Moreover, the leverage portion won’t be renewed and the outflows have already been covered in the forward markets.

Some counterparties being apprehensive about delivering dollars which may lead to Dollar shortage. The growing demand would then help appreciate Dollar in near future. However, RBI promises to supply Dollars in extreme market volatility situations and also short term liquidity if needed. Transmission of systemic liquidity deficit to neutrality is the next step of RBI, though timeframe remains unknown. 

4. Overseas dependency: Global cues remain uneven

 The reason behind remaining dovish was the global uneven cues prevailing in the markets. On one side US had witnessed a slowdown in growth amid reduction in the industrial activity and exports in Q1 coupled with the recent disappointing jobs data. On the contrary Eurozone saw a recovery where its GDP grew strongly owing to the spending growth and unemployment reduction. Simultaneously the second biggest economy China has seen a drop in its GDP. 

5. Inflation: Surprising for Rajan himself

Inflation data that was out in April was surprising to the governor too. However, going forward he promised 5% inflation target by FY17. Monsoon would be the driving factor in the coming session for the markets. To curb further growth in CPI, the food price management along with the supply management by the government would help in achieving the 5 per cent target by FY17. Dis-inflationary pressures only if monsoon plays well.

The point to be noted is that the lending rate cuts to the individuals have been highly disproportionate to the repo rate cuts by RBI. Since the beginning of the accommodative cycle the repo rate cuts have accounted to 150 bps while the rate cuts for individual borrowers are not even half of it. Simultaneously, the sudden shock of CPI to 5.9 per cent driven majorly by the food inflation amid oil price hike has been the matter of concern. To add to it banks have also committed high NPAs. Considering the scenario, where is the money exactly going then?

RBI forecasts various macroeconomic factors which derives further growth of the country as a whole.