#RBI keeps repo rate unchanged at 6.5%.
#ICICIBank's B Prasanna and #DBSBank's Radhika Rao discuss the impact of the move.
#ICICIBank's B Prasanna and #DBSBank's Radhika Rao discuss the impact of the move.
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00:00 [MUSIC PLAYING]
00:03 Hello and welcome.
00:07 You're watching NDTV Profits special RBI MPC coverage.
00:12 I am Pallavi Nihata.
00:13 Now, the RBI Governor, Shaktikanta Das,
00:17 as was largely expected by the markets,
00:21 decided to keep the benchmark lending rate at 6.5%.
00:26 The RBI and the MPC have also voted
00:30 to continue to maintain the stance at withdrawal
00:34 of accommodation.
00:35 But for more insights and their analysis from today's MPC,
00:41 we're joined by B. Prasanna, Group Head, Global Markets,
00:44 Sales, Trading, and Research at ICICI Bank,
00:47 and Radhika Rao, Senior Economist at DBS Bank.
00:51 So thank you so very much for taking time out for us today.
00:54 Thank you.
00:54 Thank you, Pallavi.
00:58 So to begin with, what were your quick takeaways from today?
01:02 So I think, broadly, Pallavi, I think
01:07 you gave a good introduction.
01:09 Broadly, very, very as per market expectations,
01:14 I would say.
01:14 And I think the fact that there was no change in policy rates
01:19 as well as no change in stance was both kind of expected.
01:23 In fact, the voting pattern at 5-1
01:25 was also kind of expected for both the policy
01:27 as well as the stance change.
01:28 I think the significant takeaway possibly
01:32 is the fact that the continued focus on not only
01:36 the target of 4%, but the fact that it
01:40 reams to be durably at 4% even after it just touches.
01:45 So basically, it means that we're not really
01:47 comfortable with it touching at 4% and then going back up.
01:50 So we wanted to be durably stay at 4% was one takeaway.
01:56 And the second, I think, is the reiteration by the governor
01:58 again that the growth being very good
02:02 gives them the policy space to kind of address inflation.
02:06 Meanwhile, we'll quickly get in our second guest
02:09 for the show, Radhika Rao, Senior Economist at DBS Bank,
02:14 while we try and get Mr. Prasanna back on the show with us.
02:18 Radhika, hi.
02:18 Thank you so much for taking time out.
02:21 Quick thoughts on today's policy.
02:23 Broadly along expected lines, but what
02:26 were your key takeaways?
02:29 Hi, Pallavi.
02:30 Certainly, I think the central bank went into this policy
02:35 review with a couple of more data points.
02:38 They had two inflation numbers on hand.
02:40 They already had a very strong GDP outcome,
02:42 and also global central banks and their commentary
02:46 in the past six, eight weeks.
02:49 So based on that assessment, and I
02:51 think probably the most recent development
02:54 was the oil prices heading towards the 90 mark globally.
02:57 And of course, you've also seen geopolitical tensions flare up
03:00 in parts.
03:01 So I would think that the central bank's assessment,
03:04 overall economic assessment, I think
03:06 they are continuing to be very positive on growth.
03:10 I think they did see it being investment driven
03:13 in the earlier assessment as well.
03:14 At this time, we saw a bit of hint of optimism on consumption
03:17 also expected to pick up.
03:19 They have maintained their overall forecast,
03:21 but if you see the quarterly profile,
03:23 there's a very slight change in terms
03:25 of the first half of the year.
03:27 And in terms of inflation as well,
03:29 they expected to be at 4.5%.
03:31 That means still above target.
03:32 But in one of the quarters, it actually slips below 4%,
03:35 and that's what the quarterly profile seemed to suggest.
03:39 Apart from all of this, and I think
03:40 they have really emphasized, and I
03:42 think if you see the monetary policy report, which also got
03:44 released alongside, there's quite a strong emphasis
03:47 on weather related issues and those concerns for food
03:50 inflation.
03:52 Again, you and I know that central bank policy doesn't
03:55 or can't do much for supply side pressures.
03:58 But of course, the channel that they can make sure
04:00 doesn't happen, spillover doesn't happen,
04:02 is inflationary expectations.
04:04 And that's why they've spoken about the warning from IMD
04:06 about potential heat in high temperatures from April to June.
04:11 And possibly after that, we could still
04:13 enjoy a normal southwest monsoon, which
04:16 would be very important for food grains.
04:18 So in the near term, to conclude,
04:20 I think the strong growth above target inflation
04:24 is still very much in place, which outright doesn't tell you
04:29 that there is sufficient room to ease policy
04:32 or there is an imminent dovish pivot in view.
04:35 And I think the other one is, of course, to watch weather.
04:38 I think between now and when they meet next
04:42 or in the quarter after, there are two, three developments
04:45 which I think they're keeping a very close eye on.
04:47 Perhaps we can discuss this in the next section.
04:49 Absolutely.
04:51 Mr. Prasanna, now that we have you back online with us,
04:54 I do want to ask you, like Radhika too pointed,
04:57 we do expect inflation in Q2 to actually fall below target,
05:03 even if it's just for that one quarter.
05:06 At that point, real rates are going to be fairly high.
05:11 So despite the fact that for the full year,
05:14 we're still looking at an inflation forecast of 4.5%,
05:18 that is above target, do you still pencil in a rate cut,
05:22 even if it's a modest one of maybe about 25 bps back in Q2
05:29 when inflation is expected to fall below target?
05:34 So first of all, Balabhi, I hope you can hear me now.
05:36 Yes, I can.
05:37 So I think Dr. Michael Patra was making a very interesting point
05:42 about real rates.
05:44 It not only is real rates important,
05:45 but it's also important from what level of expected
05:49 inflation we are looking at that inflation
05:52 and the distance that level of inflation
05:54 has from the target.
05:55 So when you're having an expected inflation of 4.5%,
05:58 and then you calculate 2% real rate,
06:01 it does not necessarily mean it's very high
06:03 is the point he was trying to say.
06:05 So I guess a higher real rate of interest
06:07 in order to bring inflation down to 4
06:10 is required when the current inflation is
06:12 much higher than the target.
06:14 And then as we go forward, it comes down.
06:16 I think that's the point he was trying to make.
06:18 So maybe the real rate argument needs to be nuanced
06:21 from that perspective.
06:22 The other thing is the fact that just because quarter 2
06:27 inflation goes to 3.8, but the fact
06:30 is quarter 3 and quarter 4 again goes back much above 4
06:32 to say something like 4 and 1/2.
06:35 I mean, he made sure, the governor
06:37 made sure that the market doesn't run away
06:38 with expectations of big rate cuts because of this fact.
06:41 And that's the reason why he keeps
06:43 saying about the durability of the inflation
06:47 target being achieved at 4%.
06:48 So all in all, I think that's the reason why at the margin
06:52 the market might probably take this
06:53 as a hawkish kind of policy, primarily
06:56 because he's not just letting the comfort come
06:59 into the market that inflation is very well controlled.
07:02 Because we all know that quarter 2 inflation
07:04 is going to be lower.
07:06 And we all know it's also a part of a base effect
07:08 because momentum of inflation still continues to be good.
07:11 So from that perspective, I think
07:12 he's managing expectations pretty well.
07:14 Having said all this, Pallavi, I think
07:17 what happens in the Fed will also
07:20 have a bearing on the way RBI charters
07:22 its policy as we go forward.
07:24 He's, of course, not going to say that in so many words.
07:27 We do make policy for our own domestic priorities.
07:30 But at the same time, we don't live in an isolated world.
07:33 We live in a relative world.
07:34 And what happens to the Fed and what happens to the dollar
07:37 will have to have a bearing either indirectly or directly
07:40 into what we also do.
07:42 So I guess monsoon is one.
07:45 Going past the quarter 2 inflation
07:47 and looking at quarter 3, quarter 4 also being close to 4
07:50 is the second.
07:52 And the third is to see Fed actually
07:55 acting in the cycle behind us rather than ahead of us.
07:58 I think that's the most important thing
08:01 that the governor is possibly waiting for.
08:04 So we are penciling a shallow rate cut cycle.
08:07 But we are probably moving the first rate cut from August
08:11 to October due to the kind of nature in which not only
08:15 the Fed is moving, but also the way in which the governor spoke
08:18 today.
08:19 Got it.
08:19 OK.
08:20 I have the same question for you, Radhika.
08:23 Given that the global macroeconomy does
08:27 appear to be looking up, we have seen fairly encouraging data
08:31 not just here in India for GDP, but globally as well.
08:35 And given the commentary today, do
08:38 you think there might be a little bit of a chance
08:42 that the RBI might even possibly cut rates before the Fed does?
08:48 I do think that there is some similarity in terms
08:54 of the undercurrents that the Fed is facing as well as
08:57 what the RBI is facing.
08:59 I think both are in a situation where growth is strong.
09:03 And especially in Fed's case, of course,
09:05 there are many market participants
09:07 who came into the year thinking there
09:08 could be a technical recession, soft landing, hard landing.
09:12 Those conversations are still going on.
09:16 But both are in a situation where growth
09:18 is stronger than expected.
09:21 And I think that's allowing them the headroom
09:23 to go ahead and wait it out until inflation actually
09:27 heads towards target.
09:29 On Fed part, I think they've already
09:30 mentioned that they might not see inflation at their target.
09:34 But as far as it heads there, they're happy with that.
09:36 In RBI's front, certainly, I think what happens globally
09:39 is important.
09:41 But I think time and again, in today's press conference
09:43 as well, the governor did mention
09:45 that domestic considerations will be far more important.
09:47 And I think amongst Asian central banks,
09:49 you've actually seen that not many of the central banks
09:53 actually moved as much as the Fed did.
09:56 So when the Fed reverses course, the Asian central banks
09:59 also will not need to do as much.
10:01 When we come to the RBI's point, I
10:03 think the scope of RBI moving before the Fed
10:06 is rather small in our personal view.
10:09 We have already expected them to move only in October.
10:12 I would think the debate would be more towards cut by how much
10:17 or cut at all, I think, rather than them bringing it forward
10:22 by any remedies.
10:24 I think the other one is--
10:25 so at this point, look at growth, look at inflation.
10:28 Both don't make a justification to essentially go ahead
10:32 and cut rates.
10:33 And as Prasanna also highlighted from the press conference,
10:36 it was made quite clear that real rates matter,
10:38 but real rates matter insofar as also comparing
10:41 where the inflation is at 12 months from now,
10:43 vis-a-vis the target.
10:45 So all these points tell you that there are no clear signals
10:49 of being dovish.
10:50 I think it's all market expectations, market pricing.
10:52 And every subsequent meeting that the RBI comes out
10:56 and does not change stance, does not move on rates,
10:58 that market pricing in terms of rate cuts
11:00 continues to get pushed back.
11:02 So I think to answer your question,
11:04 I don't think there is any scope of--
11:06 in our view, at least, that the RBI will move before the Fed.
11:09 I think, if anything, they would prefer to be more cautious.
11:12 And between now and the next two quarters,
11:17 at least, they have an election.
11:18 They would like to prefer that financial conditions remain
11:21 stable.
11:22 Then you've got index inclusion that starts in June,
11:26 and it happens in a phased manner.
11:27 So even then, where the currency is, where rates are,
11:30 wouldn't matter.
11:31 And of course, the third would be Southwest monsoon,
11:34 which also starts somewhere in May to July, August.
11:38 So all these things are event risks
11:40 that they're watching out for.
11:42 But as far as policy is concerned,
11:44 a very little justification at this point
11:46 to go ahead and pivot towards a dovish leaning.
11:51 OK.
11:52 So time for a break now.
11:54 But before we do that, will the RBI
11:56 follow the US Fed's path and consider cutting rates?
12:00 That was the question asked by my colleague Vishwanath
12:03 during the RBI's post-monetary policy presser.
12:07 Here's what Governor Shaktikanta Das too had to say.
12:10 Listen in.
12:12 You spoke about the real rates in detail.
12:14 But the bottom line is you're not seeing 4% in FY25,
12:20 at least according to your projections at this point
12:22 in time.
12:23 There was hope that when the US Federal Reserve supposedly
12:26 is going to cut rates in June, then the RBI might follow.
12:29 Are we looking at any indication of a rate cut
12:33 this financial year or not?
12:35 That's my primary question.
12:37 With regard to the rate cut this year,
12:40 I cannot give you a forward guidance.
12:43 In fact, countries which give dot plots also,
12:47 the dot plots keep changing from meeting to meeting.
12:51 So with regard to rate cut or whatever rate action--
12:54 I mean, let me not say rate cut.
12:56 But whatever rate action, it is linked to the evolving
12:59 path of inflation.
13:02 So on that, I cannot give you any forward guidance.
13:06 And the other point which you mentioned about expectation
13:08 linked to US rate cut, I think, as I
13:13 have said on a number of occasions
13:14 earlier, our monetary policy is primarily
13:19 guided and determined by our domestic situations.
13:24 So we do not just follow the footsteps of the US Fed.
13:29 In fact, if you just recall in the past several months
13:33 or past few years in particular, I can talk about,
13:37 I mean, we did our rate cuts, our rate cut,
13:43 which we did in 2019, or the rate,
13:47 beginning of the rate increase, which we did in 2022,
13:53 they did not really-- they actually
13:55 preceded US Fed action.
13:57 So therefore, our policy is governed and determined
14:01 primarily by domestic circumstances.
14:04 Mr. Prasanna, I'll come to you first.
14:06 So I do want to ask you, broadly,
14:08 the expectation for the benchmark bond deals going
14:11 forward is for them to range between about 6.5% to 7%.
14:16 And what is the figure that you are looking at?
14:20 Also, can we expect weighted average call rates
14:24 to also now trade below the repo rate going forward?
14:29 So, Pallavi, I think bond deals are
14:32 going to be between 7% and 7.15% kind of levels
14:38 till maybe the first quarter gets over.
14:41 And after that, when the bond index inclusion comes,
14:45 and hopefully the Fed would either
14:47 have indicated that they're going to cut very soon,
14:51 or they have actually cut, then bond deals can slip below 7%.
14:56 So our range is somewhere between 6.65% and 7%
15:01 by the second half of this financial year,
15:03 and between 7% and 7.15% for the first quarter.
15:08 And on the question on the weighted average call rate,
15:12 rest assured that even when RBI changes its stance
15:17 and becomes a little easy, it's going
15:19 to make sure that it's going to mop out excess liquidity
15:23 to ensure that the weighted average call rate does not
15:26 slip too far below repo rate.
15:29 So they always have been having an asymmetrical kind
15:32 of a reaction between when liquidity is surplus
15:34 and when liquidity is deficit.
15:37 When liquidity is deficit, they're quite slow
15:38 to act to give money to the system
15:40 because their stance was also such.
15:42 But when liquidity is surplus and it goes below repo,
15:46 I'm sure they are going to use these multiple instruments
15:49 to take it out.
15:50 Not the long-term instruments like OMO sales and all that,
15:53 but at least the BRRRs and then take it out.
15:56 So I would assume that it'll be an achievement
15:58 if weighted average call rate is close to the repo rate.
16:01 That itself is good enough for the market
16:03 because the market is coming from a period
16:05 when there was a stealth hike, so to speak,
16:07 and the weighted average call rate was about 25 basis
16:11 points or so above the repo rate itself, which is
16:13 considered as a policy rate.
16:15 So I think that that's the way to really look
16:18 at it going forward.
16:19 OK.
16:20 Radhika, coming to you, I do want to ask you.
16:22 So for the longest time, we've had a wide term premium
16:27 here in the Indian markets.
16:29 But going forward, considering the broader expectation
16:32 given domestic and global factors,
16:34 is some easing on the benchmark bond yields.
16:39 Is a smaller term premium then going
16:42 to be a problem towards maybe the second half
16:45 of the fiscal year?
16:49 No, I wouldn't necessarily call it a problem.
16:52 I think there will be two different drivers that
16:54 will drive two ends of the curve, I would think.
16:56 The short end, for it to correct quite sharply,
16:59 you will need quite a clear signal from the central bank
17:03 on the policy front.
17:04 And I think we have discussed that in quite detail.
17:07 On the longer end, of course, right now the curve
17:10 is pretty flat.
17:10 But what you do see is, again, there too you need to be--
17:15 right now you're seeing a lot of inflows
17:17 kind of keeping a lid on the yields as well.
17:19 And in fact, there are two way forces.
17:21 There's inflows capping up move, and on the downside,
17:25 you've got what's happening globally.
17:27 You've got the US yields that started the year
17:29 on a sub 4% footing.
17:31 And now you have seen them seem quite an increase.
17:35 So going forward, I think on our focus are not very different.
17:39 We, in fact, also expect yields to be--
17:42 that is the long end of the curve--
17:44 to be at about 7%, 6.95% at best in the first half
17:48 of this fiscal year.
17:50 I think in terms of flows, we've already
17:52 seen about 6, 7 billion flows into bonds,
17:55 front running the index inclusion,
17:57 just this calendar year.
17:58 And now with those kind of flows,
18:00 even then you have seen the rupee actually weaken.
18:02 So the central bank has been very active in absorbing
18:05 those flows.
18:06 In fact, in the MPC today as well, or at the meeting,
18:09 the RBI did mention about the fact that the reserves--
18:14 because generally markets are questioning now at what point
18:16 will they stop in the sense that it's 650 OK, 680 OK,
18:19 700 billion OK in terms of the reserves.
18:22 And I think the central bank made it quite clear
18:24 that they don't have any target in mind.
18:26 And it is a function at the end of the day
18:28 of strengthening your own country's balance sheet
18:31 and is also in terms of wanting to minimize
18:33 any one-sided swings on the rupee according to us.
18:37 So coming back on the yield front,
18:39 I would think that first half, not so much of movement.
18:44 I think we barely see going down to about 6.95%.
18:46 This is our own in-house forecast.
18:48 In the second half of the year, we
18:50 could see a bit more softness.
18:51 But insofar as the flows are concerned,
18:54 I think it is quite clear that the central bank would not
18:57 want a very strong impact on the currency or on yields
19:03 just because of the flows.
19:05 And on the liquidity part of the equation,
19:07 I think liquidity being relatively kept tight
19:10 also kind of gels with what they have been talking about in terms
19:13 of policy transmission.
19:15 There was a very passing mention in today's review.
19:17 Much more time was spent on it in February.
19:20 And keeping excess liquidity in check
19:24 kind of also aids your overall policy transmission, which
19:27 continues to happen.
19:29 And I think it will expedite because you've
19:31 got this external benchmark lending rate.
19:33 Loans under it now almost about 56%, 57% of outstanding.
19:37 So we're just increasing.
19:39 And then MCLRs are basically coming down.
19:42 So net lend, yes.
19:43 To answer your question, I would think short-end and long-end,
19:45 we will look at two different drivers.
19:47 Thank you so much for that, Mr. Prasannan.
19:49 Thank you so much for joining us, Radhika.
19:51 That's all the time we have on the show for now.
19:55 But do stay tuned to NDTV Profit.
19:57 We have a lot more lined up.
20:00 (dramatic music)
20:03 (gentle music)