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  • MODERATOR:

    Hello and welcome to the webchat with Madan Sabnavis, Chief Economist, CARE Ratings post the Reserve Bank of India's monetary policy review



  • R

    RISHI

    Following the the rate cut by the RBI, how would it impact USD/INR for short and long term perspective?

    MADAN SABNAVIS

    USD will be driven more by forex fundamentals and external factors to my mind. Present lowering of rates can affect FPI inflows which are already down. Forward rates may ease a bit, but not significantly I think.


  • V

    VIPUL

    What is your take on the 25 bps rate cut by the RBI at its policy meet today?

    MADAN SABNAVIS

    was more on expected lines as the RBI had already committed to such a move covertly in case the budget was not pushy and the small savings rate reduced. the issue was more whether it would be 25 or 50. the important question to ask is whether or not this will lead to a pick up in offtake in credit. this is where I am skeptical especially on the corporate front as most industries have low demand conditions and surplus capacity. but for sure interest cost will come down which will help their profit lines.


  • D

    DINESH

    The RBI in its report said the impact of the seventh pay commission will be significantly lagged as compared to previous pay commissions. What is your reading on the same?

    MADAN SABNAVIS

    we should be cautious on this score. while the pay hike involves say Rs 1 lkh crore, around 25-30% will come back as taxes to the government and another 30% saved. Hence we are talking of Rs 40-45000 cr of spending which to my mind cannot be inflationary given excess capacity in the system. as there are no arrears involved and the full amount is not coming in immediately, there will be only a lagged effect.


  • T

    TARUN

    What could possibly be the medium to long term impact in wake of the liquidity measures in the RBI policy review?

    MADAN SABNAVIS

    The liquidity measures impact will be to the extent of around Rs 20,000 cr which is much lower than say a CRR cut of 0.5% would have achieved. This said, we must remember that the RBI is going to focus more on OMO to infuse liquidity, which to my mind will become frequent as deposit growth is tardy.


  • S

    SAHIL

    Keeping in view the current economic situation and possible improvement going forward do you expect any further rates cuts during calendar 2016?

    MADAN SABNAVIS

    we are looking at another 25 bps cut which will probably be only in Sep-Dec when the monsoon/kharif impact is known. it is unlikely to have it before this period. we should remember that the RBI has spoken of a real interest rate of 1.5-2%. presently with repo at 6.5% and inflation at 5.2% we are at 1.3%. There will be room only if inflation comes down sharply, which does not look likely as of date.


  • M

    MOHAN

    The central bank has projected that CPI inflation is likely to decelerate modestly to around 5% and GDP is expected to grow 7.6% in FY17. What factors could possibly alter the above math?

    MADAN SABNAVIS

    5% to my mind is a kind of standard inflation rate which we cannot eschew. this is the latent inflation rate in the country. it can go down temporarily more due to short term factors but in the medium term, will be mean reverting. this said, it can be upset by a bad monsoon or a revival in commodity prices globally. GDP growth or 7.6% looks likely as the economy has walked this slow growth path for 2 years now. even a farm failure has been buffered against by the economy. the only concern is that we are unable to get on to a higher and faster growth path, which is a challenge. In short, 7.6% is unlikely to be breached unless there is a major shock like the financial crisis of 2008 which is very unlikely. the only hitch could be the RBI increasing rates if inflation soars to 10% or so, which again does not look likely today.


  • B

    BIMAL

    What are trends do you see in the near-to-medium 10-year benchmark yields? What about yields on short term papers below 1 year?

    MADAN SABNAVIS

    The yields will move in the downward direction for sure. The only factor that will drive the pace of movement would be the inflation rate as well as expectations of further RBI rate cuts. I should think that the rate will move towards 7.35 or so in the next 2-3 months. Short term papers will mimic the 1- year GSec by 4-5 bps.


  • P

    PRANAV

    After accomplishing its first objective of meeting short term liquidity needs what is the objective of modulating net foreign assets and net domestic assets growth over the course of the year?

    MADAN SABNAVIS

    Net foreign assets become important mainly as it is affecting the overall money supply and hence liquidity. RBI action on purchase/sale of forex assets has also impacted liquidity while tackling the exchange rate. it is a tough call for the RBI as liquidity issues have come up of late. Also the RBI has to be prepared for the outflow in September of forex due to the FCNR deposits maturing for which we need to have the back-up reserves.


  • K

    KRISH

    Do you see the recommendation by a working group of the central bank to introduce interest rate futures based on the overnight call money borrowing rate a good move?

    MADAN SABNAVIS

    It is a good move because we need to have several such instruments for the development of a meaningful derivative market which offers hedging opportunities especially for bond market players. however, we have not been successful with the 10 years GSecs or TBills IRFs which have been quite lackluster. But given that we are talking of call money rates, it will be interesting to see how this evolves.


  • N

    NARESH

    Currently, the rupee rate against various global currencies is determined after quotes from a select list of contributing banks. The RBI now plans to move over to a process of determining the reference rate base on actual market transactions on volume weighted basis with effect from May 2016. What is your view on the new process?

    MADAN SABNAVIS

    there has been some skepticism on the way in which polling is done for any price. having it based on actual trades by a formula is definitely a more transparent way of doing it. while normally one would not expect banks to mislead, the LIBOR case has led to this argument that when all trading today is almost online, why cant we actually have a traded average as the price for a homogenous product. This should work for interest and forex rates though not for commodities.


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