The Reserve Bank of India (RBI) took the market by surprise today with its hawkish tone, regardlessof holding the repo rate constant and keeping its present position as anticipated.
With the US Federal Reserve now preparedfor to cut rates by 125 basis points in 2024, a substantial shift from the 25 basis points anticipated throughout the June policy, some market individuals had expected a more dovish signal from the RBI.
Contrary to these expectations, the RBI’s declaration and press conference exposed indications of hawkishness. The customer rate inflation (CPI) projection for the July-September quarter was raised to 4.4% from the earlier forecast of 3.8%. Additionally, the RBI hasactually modified its CPI projection for the veryfirst quarter of FY26 to 4.4%, up from 4% as predicted in the April financial policy report (MPR).
This raises the concern: is the RBI being properly careful, or is it being excessively mindful? To checkout this, CNBC-TV18 held a panel conversation with B Prasanna, Head of Global Markets Group at ICICI Bank; Mridul Saggar, previous Executive Director of RBI; Samiran Chakraborty, Chief Economist for India at Citi; and Dinesh Khara, Chairman of State Bank of India.
Here are the modified excerpts:
Q: The expectation was that possibly some wriggle space they will make for themselves in case they have to cut in December or earlier. What might haveactually been the believing of the RBI? Why didn’t they enable themselves that wriggle space?
Saggar: The mostsignificant issue that a main bank dealswith is, if it suggests that there is a shift in conditions and they may pivot, then they will toosoon ease monetary conditions. If you see the information difficult, the banks have currently decreased the loaning rate rather of raising it over the past 2 months. On the deposit side, they have not reduced, simply 2 basis points fall is there in 2 months. But on the loaning side, there hasactually been a fall.
So if the RBI offers a signal, then mostlikely the deposit rates will ease at a time when there’s currently a substantial concern about the inequality of credit and deposit ratios.
The incremental credit deposit ratio, consistingof the financialinvestment number, is quite high. Banks are growing at 128% approximately of the deposit development. There is this liquidity angle, which the guv hinted at, about the monetary stability threat originating from it. I believe that’s what is keeping RBI mindful.
Also, inflation hasactually increased to over 5%, whereas the target is 4%. It’s extremely tough to sort of signal. If the pivot comes lateron, it would be when we see tough numbers that the development is impacted, which is not the case as of now.
Q: Bank loan rates haveactually gone down a bit in the past coupleof weeks, although there is a war out there for deposits. Can you discuss? This appears to have amazed on the Reserve Bank as well. How do you drop loaning rates when your deposit expenses are going up?
Khara: Actually, what has occurred is that there is a modification in the interest rate structure when it comes to financing. A lot of loans are being connected to the T-bill. And from that viewpoint, as far as T-bill is worried, it’s coming down, however when it comes to liquidity problems, that forces banks to go for the greater expense of deposits. This is the kind of market in which we are all operating today. Some of the loans are connected to MCLR, and some of the loans are connected to T-bill, so it depends on the bank and the kind of interest rate criteria that they are following.
In such a scenario, possibly when RBI has stated that they are worried about the interest rate motion and deposit rates, I believe it’s rather understandable, however I would state that there are different sub-segments in the market, and