SLR cut a precursor to fiscal consolidation: Shubhada Rao

Q&A with chief economist, YES Bank

 

Shubhada Rao, chief economist, YES Bank talks to Jinsy Mathew on the Reserve Bank of India’s (RBI’s) bi–monthly review of the Monetary Policy and the road ahead for the economy. Edited excerpts:

How do you read today’s Policy in the backdrop of the change of guard at the Centre?

The policy was very much in line with expectations. A status quo was warranted on the rate front as the risks from El Nino persist. Also, the RBI would want to wait and see the Budget proposals. With a strong Government in place, there are expectations of a resolute promise on delivery to address the supply side constraints. This is the probably takeaway for the RBI from a strong Government in place.

So, risks on food prices if managed better by the Government may not threaten the inflation trajectory and that has been indicated by the RBI. As such, this is probably the first time we have seen the central bank actually mentioning a likelihood (though not of high probability) of a change in Policy stance and for me the biggest signal this Policy gives is a well coordinated monetary and fiscal policy move.

A 50 basis points cut in statutory liquidity ratio (SLR) was a surprise announcement. How do you read this move?

Given that the RBI could not have tinkered with rates as yet, a reduction in the pre-emptive funds, particularly in the wake of adherence to fiscal consolidation as promised by the Government, gives RBI the scope of easing some of the funds. This paves way for improved credit flow to the private sector given the growth impulses that are likely to play out over the next few months. So, an SLR cut could be a precursor to fiscal consolidation.

Isn’t it premature to talk about cutting rates given the uncertainties in the form of El Nino?

It’s too early to say with conviction that rate cuts are just round the corner, but the entire confidence emanating from a very strong Government actually has at least brought on table a chance that RBI could compliment the Government by cutting rates. There are two parameters to watch out for in this context are – El Nino and the quality of fiscal adjustment.

But, do you see the persistent retail inflation as a spoiler?

When we say retail inflation, 47% of that is attributed to food inflation. So, even if there is an El Nino; but food management is better, either by supportive legislation like releasing surplus food grains from surplus food stock of FCI – the runaway expectation which usually emanates from food and fuel can be managed. So if these factors are contained, the risk of inflation expectation remains low.

What is the likely bond rate trajectory in the near-term?

Bond markets in the near-term are likely to be between 8.7-8.9%. We do not see a 9% rate, which is likely only in certain extra-ordinary circumstances. We see the year closing by at 8.3%.

What is the FY15 GDP target you are working with?

On the ground, the momentum is yet to pick up while enabling conditions are being created. For these to manifest in actual numbers, it will take a while. Hence, we retain our 5.4% growth target for FY15.