RBI needs to signal change in approach, policy stance

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SummaryThe Reserve Bank of India need to cut policy rates by at least 25 basis points next week if growth has to be safeguarded, says P Mukherjee, president, treasury and international banking, Axis Bank.

The Reserve Bank of India need to cut policy rates by at least 25 basis points next week if growth has to be safeguarded, says P Mukherjee, president, treasury and international banking, Axis Bank. In an interview with Aparna Iyer, Mukherjee says fuel price hikes may drive up inflation in short-term, but that should not deter RBI from cutting repo rate. Excerpts

Do you think it is the right time to start cutting rates? What are your expectations?

I believe RBI will give two cuts of 25 bps, one in January and one in March. I think time has now come for RBI to signal a change in the approach or stance of the policy. RBI has so far been proved right in all steps it has taken and its concerns over inflation have been well founded. The only point here is that if it still hold rates, growth could get damaged irreversibly.

There are visible deterents to rate cuts like impact of fuel price hike on headline inflation...

The fuel price hikes may not necessarily drive up inflation. Diesel price hike is redistribution of money as subsidy element gets reduced. The fiscal deficit is the bigger problem here. Of course, in the short-run, the headline inflation will go up. There is certainly that risk, but even when it does, the fiscal side response will be more positive.

Will banks pass on the rate cut as deposit growth is low?

I think transmission to lending rates would automatically follow. And it will happen very quickly. Banks’ funding cost will come down which will encourage lending rate cuts.

What is your forecast on bond market? Is there some more rally left?

I think the 10-year bond yield slipping below 7.80% is possible. There has been latent buying interest all the time in the market. The challenge was that people were worried about mark-to-market hit earlier, but now that worry has come down. Investments are looking good as bonds have gained. January-March period is a better quarter for treasury gains than the earlier quarter.

There has also been an increased buying by FIIs in government bonds. What is driving this?

The FII interest in bonds can be explained looking at two major factors. There is an overall dollar liquidity overhang globally and of late the outlook for India has improved significantly. The threat of rating downgrade has diminished. So this is attracting flows.

Banking system’s SLR has been at 30%, even though mandated

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