There is room for the Reserve Bank of India (RBI) to cut the repo rate by 50 basis points in 2017-18, Badrinivas NC, Country Treasurer & Head — Local Markets Treasury, Citi India, told Shamik Paul in an interview. He expects the RBI to sell bonds via OMOs to the tune of Rs 40,000-50,000 crore in the next two-three months to absorb excess liquidity. Excerpts:
The liquidity in the banking system is persistently high. Is it a big concern?
Remonetisation is a gradual process — a lot of money came into the banking system but not all of it has gone back. Also, we have had sufficiently large foreign flows into the country. In the last couple of months, the debt flows have been good. The FDI flows continue to be strong. So all these factors have resulted in the surplus liquidity conditions and this scenario is likely to continue. From the Reserve Bank of India’s perspective, they would like liquidity to be within a manageable level, which helps anchor overnight rates close to policy rates. With the system liquidity already in surplus, liquidity management could get complicated if the RBI’s forex intervention becomes large. If they have to build more forex reserves and keep the currency from appreciating too much, then there would be a consequent increase in the domestic liquidity surplus. This is what has prompted the OMO sale of bonds.
Do you have an estimate for the amount of OMOs that is likely to be announced?
It’s becoming apparent that some of the surplus liquidity is of a more enduring nature, and therefore to that extent, the OMO sale of bonds as a mechanism to absorb that liquidity will continue for some more time. Over the next two-three months, we estimate OMOs to the tune of Rs 40,000-50,000 crore. After that, as the festive season kicks in, it is a question of whether the seasonal and historical outflow in currency happens at the same pace as before. Between September and March, Rs 1-1.5 lakh crore actually goes out of the banking system every year. Based on that assessment, they will decide whether they need to do more OMOs. Typically, once the currency outflows start, the need to continue OMOs will not be there. But we will have to wait and see.
Where do you see the policy rates?
There is a strong rationale for a 25 basis points rate cut in the August policy, and if you look at our inflation projections, we think there could be space for another 25 basis points before the end of the financial year. So broadly, I think there could be up to two rate cuts in the next 6-9 months. That leaves scope for the bond yields to move lower. If the OMO numbers from the RBI surprises on the higher side, then there could be some pressure on the back-end of the curve and there could be some steepening of the yield curve. The inflation movement between now and the next 6-9 months should probably be hugging the lower end of the MPC’s forecast, even after adjusting for the HRA increase. If the MPC gets visibility of March 18 CPI (both headline & core) going below 4% , I think they would be comfortable with an accomodative and easing bias. Barring global issues and any significant supply shocks, the 10-year benchmark bond yield could move towards 6.25% in the next 6 months. What is your view on the rupee? The rupee continues to be a favourite currency globally. We tick a lot of boxes on the macro stability side. We have reasonably high growth, we have an inflation which is well contained, we have high real interest rates — and that is a big positive. The currrent account deficit is not very high. All these factors make it attractive for people to own assets in this economy. As long as we continue to have good macro variables, the rupee will continue to be well bought. Therefore, barring any global dollar moves, in the near term, the rupee should continue to have an appreciating bias. The exact levels to which it can move will be a function of the RBI’s reserve strategy. We see the 64-64.80 range hold for some time.