Interview | RBI plan to hike CRR to impact borrowing cost for corporates, others, says Joseph Thomas of Emkay


Emkay Wealth Management’s head of research  Joseph Thomas says the Reserve Bank of India’s plan to hike the cash reserve ratio (CRR) will have an impact on the cost of borrowing for corporates as well as other borrowers.

In its final bi-monthly monetary policy review, the Reserve Bank of India left repo rates unchanged at 4 percent and kept the stance “accommodative” on February 5. The reverse repo rate was also kept steady at 3.35 percent and so were marginal standing facility and bank rate at 4.25 percent.

The central bank, however, announced a two-phase plan to restore CRR to 4 percent, a move expected to have an impact on the cost of credit.

“The extended marginal standing facility (MSF) relaxation is good for liquidity and nothing prevents the RBI from injecting liquidity into the system whenever it is required, in its assessment. So, that remains at the core of the accommodative policy,” Thomas says in an interview to Moneycontrol’s Sunil Shankar Matkar. Edited Excerpts:

Q: What is your reading of RBI policy, especially after Budget 2021? What does the accommodative stance indicate now?

The monetary policy complements the Budget in many ways, in terms of its tone, intent, and the underlying message and actions. The base rate, that is the repo rate, is kept unchanged, and the framework for the provision of liquidity remains the same. In short, the policy remains accommodative. RBI is generally expected to follow the accommodative stance of the policy till sustainable economic growth emerges. The only factor that can bring about changes in this policy is a sustained rise in the price level, the probability of which is very small at this juncture.

Q: The RBI expects FY22 GDP growth at 10.5 percent. It has a strong conviction that in FY22, India will undo the damage of COVID. Do you feel the growth expectations can be achieved or surpass in FY22?

The estimates of GDP growth for FY22, from all major agencies, both domestic and international, have been in the range of 10 to 11 percent. While this growth may not be surpassed, it is almost certain that it may not be substantially lower than that too, given the pick-up in general economic activity, and the rebound in manufacturing and industrial activity.

There are possible disruptors like a second or third wave of the pandemic engulfing our country as also other major countries, escalation of the border issues with China, a steep rise in interest rates, etc. But conviction abounds, in our ability to have better control of things, and thereby, grow much faster.

Q: The RBI has revised its CPI inflation projection to 5-5.2 percent for the first half of FY22 against 4.6-5.2 percent earlier, while the CPI inflation projection has been revised downwards to 5.2 percent for Q4FY21 from 5.8 percent earlier. What is your view? 

The RBI projection of inflation is based on RBI’s assessment of the economic conditions, and they also hold surveys on various aspects of the economy, including expected inflation. In the latest survey, the responses summed up to expectations of slightly moderate inflation in the immediate term and more or less the same level of inflation over the next one year or so. RBI estimates are based majorly on this.

On food inflation, we may see lower prices in the coming months due to a better supply of fruits and vegetables after a good winter crop and a better kharif harvesting season but the prices of pulses may remain high. In the non-food category, one thing that may potentially cause some trouble is fuel prices. Brent is already close to $ 60 a barrel. This may not be good for the general price level as fuel prices have a cascading effect on all major items of consumption. Therefore, the inflation projections, overall, look quite conservative but close to realistic.

Q: The RBI said CRR normalisation opened up space for more options to inject liquidity and announced a two-phase normalisation for CRR. It will gradually restore the CRR to 3.5 percent in March and 4 percent in May. It extended MSF relaxation for another six months. What is your view?

There are shades of rationalising the liquidity management in the RBI policy. The CRR will be hiked by 1 percent-from 3 percent to 4 percent, to the pre-pandemic level-in two phases. This is happening between March and May, so not very far this day. We should note that any CRR measure will have an impact on the credit multiplier. This is a measure which will have an impact on the cost of credit. Lending by banks and also their borrowings will become more expensive over a period of time. It also has implications for the quantum of liquidity because to the extent of the hike in CRR, an equivalent amount of money, by way of a certain percentage of the net time and demand liabilities of the banks, will go into the RBI as part of CRR with the central bank. To that extent, liquidity will get curtailed.

To state this more directly, this measure will have an impact on the cost of borrowing for the corporates as well as other borrowers. The extended marginal standing facility relaxation is good for liquidity, and nothing prevents the RBI from injecting liquidity into the system whenever it is required, in its assessment. So, that remains at the core of the accommodative policy.

Q: The RBI decided to include NBFCs in TLTRO on-tap scheme and will provide funds from banks to NBFCs under on-tap TLTRO. It will incentivise new MSME loans by banks. Will it help NBFCs?

The very objective of Targeted Long Term Repo Operations (TLTRO) is targeted funds, or credit delivery, by banks, making investments into different types of borrowing instruments of specific sectors, which require liquidity support. NBFCs are an integral part of the larger banking and financial services domain and they satisfy a need that is important to our economic growth. The RBI statement is very clear on this, “Given that NBFCs are well recognised conduits for reaching out last-mile credit and act as a force multiplier in expanding credit to various sectors, it is now proposed to provide funds from banks under the TLTRO on Tap scheme to NBFCs for incremental lending to these sectors.”

Coming to the MSME financing, the RBI has given the benefit to banks by way of a deduction of the amount advanced from the NTDL for the purpose of CRR maintenance and this would help the banks to offer more credit at a better rate to MSMEs but the success of this programme will depend on the initiative and action of the banks.

Q: Retail investors can now access primary and secondary government bond market. Retail investors can open gilt accounts with the RBI. Is it a surprise? How should retail investors go about with gilt funds?

The objective of the RBI in this is to provide direct access to retail investors. It is not that access has not been there so far. They could access the market through their advisers or brokers and get the government securities purchased and credited to their sub-SGL accounts or demats.

What comes with the new thing is direct access with and through the RBI. This may encourage many investors to open accounts with RBI and start investing. Another useful feature of this action is that it is a reform to the existing system. Under the current set-up, the retail investors accessing markets through brokers or their banks, as the case may be, used to get a retail price for a small lot or an odd lot, which is often much higher than a wholesale price, or a large lot or market lot price. This differentiated pricing for small and odd lots will be eliminated almost completely, which will bring in more efficiency in the market access for small investors.

Gilt funds are a good avenue and mode for investing into gilts and they work on NAV, which is common for all investors as of a specific investment date. Gilts funds pickup larger market lots and therefore, they do not have the disadvantage of differentiated pricing. The RBI action is a step in the right direction. But considering the large number of accounts that they may have to open for retail investors, and which need to be maintained and serviced, it would be better if the long-awaited transformation of the debt management function of the RBI into a separate office of debt management of the GOI is realised sooner than later.

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