RBI rate cut on cards, economic activity crucial: Experts

S Seshadri, Executive Director of Bank of India and Umesh Revankar, managing director of Shriram Transport Finance Company discuss the possibilities of a cash reserve ratio or CRR cut and repo rate cut in RBI’s credit policy announcement on 17 April on NDTV Profit.

“The market has already factored in a repo rate cut of 0.25 per cent and since is a need to cut down interest rates gradually; this policy will see a commencement of cutting down interest rates,” said Seshadri.

According to Revankar, growth and demand creation are more important to boost the overall economic activity than the liquidity addition.

Below is the complete interview. Also watch the accompanying video.

What are you anticipating?
 

Seshadri: Growth has clearly been a matter of concern, even the RBI governor's statement says the same and when inflationary pressures were high when the RBI governor postponed the rate cut, the last two stands were softer and hence, growth appears to be a concern.

The market has already factored in a repo rate cut of 0.25 per cent or 25 basis points. This would signal that there is an interest rate regime, which will result in some sort of a capital expenditure. And since there is a need to cut down interest rates gradually, this policy will see a commencement of cutting down interest rates.

 Do you agree Mr. Revankar?
 

Revankar: More liquidity into the market is always good but right now what is required is growth and creating a demand for the overall economic activity. Economic activity will create demand and employment. So, we would prefer healthy growth and interest rate cut would help overall sentiments of the customers, those who have invested in the business and those who make their livelihood.

There is enough of an argument that because of prevailing higher interest rates, the asset quality suffered. Is that something do you think the RBI should keep in mind?
 

Seshadri: Higher interest regime would result in some sort of on the asset quality because if you are not able to pass on the interest cost increase to the consumers which is very difficult when there is a contraction in the demand. Apparently, there is a certain amount of liquidity crunch, which could result in lower asset quality but the RBI will not take its decision depending upon the asset quality. Basically, the problem is that the banks will have to confront. 

But from the RBI's point of view, they have seen in fact a very tight leash on the interest rate cut which resulted in softening of inflation rate. But beyond a particular point, it is not possible to have lease on inflation with very high interest rate. The RBI would definitely balance growth and inflation.

At the moment, in fact, inflationary pressures have come down and probably with a bit if a growth, although there could be some inflationary pressure, given the large economy that we have I don’t think further inflation would result in maintaining the rate at the present level, RBI would then definitely go for a rate cut.

What about lending to transport businesses?
 

Revankar: Last year, if you look at the numbers, the heavy vehicle sales were flat. So, we should not go by the total number of vehicles sold. The smaller vehicles got sold more, they play a redistribution role; mostly cater to the rural demand. So one has to look at the heavy vehicle sales, which is sluggish at around 5-6 per cent. They were not steady throughout the year.

Will the borrowing and deposit rates come down? Will that reduction be marginal?
 

Seshadri: Yes. In fact, transmission of interest rate cycle is very important and unless and until that is done. What stand the RBI takes in terms of interest rates would not result in changes in that. There will be a transmission both in terms of lending and borrowing rates and the rate cycle will certainly get re-defined on both on the liabilities and asset side on the banks’ balance sheet. 


Revankar: We would definitely like to pass on to the customers depending on the liquidity and the overall supply of the money into the market but we have always been trying to pass on the benefit to the customers and make their life more comfortable.